Defense-Related Spending in China:

A Preliminary Analysis and Comparison with

American Equivalents

by Dennis J. Blasko, Chas W. Freeman, Jr., Stanley A. Horowitz

Evan S. Medeiros, and James C. Mulvenon

The United States - China Policy Foundation

Contents

Preface ……………………………………………………………………………iii

Executive Summary ………………………………………………………………1

Introduction ………………………………………………………………………3

Section 1. Using a Common Baseline: Developing a Structure to Compare

U.S. and Chinese Total Defense-Related Spending………………………………5

Table 1. FY 2006 DOD Budget by Service and Appropriation…………………12

Table 2. FY 2006 Defense-Related Spending from Non-DOD Sources ………13

Table 3. Detailed Breakdown of the FY 2006 Military Personnel Budget ……14

Section 2. Insights into Chinese Defense Budget Structure……………………15

Figure 1. Growth of Announced Defense Expenditures ………………………17

Table 4. China’s Officially Announced Defense Expenditures …………………19

Table 5. Summary of Extrabudgetary Sources of Defense-Related Spending …30

Section 3. Insights into Chinese Defense Budget Organization and Process …31

Figure 2. The Chinese Defense Budgeting Organizational System ……………32

Figure 3. The PLA Budget Process ……………………………………………38

Figure 4. The Structure of Chinese Military Finance …………………………39

Table 6. Notional Mapping of Functional Budget Components Onto White

Paper Categories…………………………………………………………………41

Section 4. Conclusions ……………………………………………………………45

Appendices ………………………………………………………………………49

Delegation Members ……………………………………………………………51

ii

PREFACE

The mission of the United States – China Policy Foundation is to improve mutual

understanding and communication between Americans and Chinese. There are few

aspects of China that have been subject to greater misunderstanding, not to say wilder

conjecture and distortion, than the country’s defense budget and military spending. The

issues involved are too important to be left to speculation. That is why the Foundation

was especially pleased to work with the General Staff Department of the People’s

Liberation Army to facilitate a delegation of distinguished American experts to engage in

an intensive exchange of information on this subject with active and retired PLA officers

in November 2006.

The result of those exchanges is this report. We at the Foundation believe it offers a

significant contribution to the factual basis for public understanding of the defense and

related budgets in China and the United States, even as it establishes a benchmark for

future exchanges and further advances in mutual understanding and pioneers a

methodology for international defense-spending comparisons with implications far

beyond those for Sino-American relations. We are pleased to note that our Chinese

counterparts have informally indicated a desire for the process of mutual discovery begun

in 2006 to continue. We are gratified and honored by the prospect that the Foundation

can help to advance this process in the years to come.

Chas W. Freeman, Jr.

Co-Chair, United States - China Policy Foundation

iii

EXECUTIVE SUMMARY

In November 2006, Ambassador Charles Freeman, Jr., co-chair of the United States –

China Policy Foundation (USCPF), led a U.S. delegation of four experts to Beijing to

participate in a Track II exchange (i.e., non-governmental) on the subject of Chinese and

U.S. defense budgets.

Prior to our trip, the Chinese government had released a series of White Papers, each of

which discussed the basic composition of the defense budget. Likewise, each March,

around the time of the National People’s Congress, the size of the official defense budget

is announced, sometimes with corrections to update numbers from previous years. Since

the first White Paper on arms control in 1995, the announced defense budget has grown

by over a factor of six, from approximately RMB 55 billion in 1994 to about RMB 350

billion in 2007.1 Each White Paper also outlines general reasons for the increase in

funding – improving the pay and standard of living for personnel is traditionally foremost

in order to keep up with growth in the civilian economy. Defense spending is broken

down into three main categories of personnel, operations and maintenance, and

equipment, each of which receives about one third of the total announced budget. This

one-third distribution was skewed slightly because of the large pay raise of 2006.

Moreover, the personnel account now has seen the largest rate of increase over the 14

years for which data are available. It is generally recognized, however, that the official

announced defense budget does not include all sources of extrabugetary funds available

to the Chinese armed forces.

Evidence exists indicating that China’s “total defense-related spending” also includes

funding from three major sources: 1) other central government ministries and

organizations, 2) local governments, and 3) from within the PLA itself. Many questions

remain about the amount and source of funding for foreign equipment purchases;

spending on military research and development; military-related infrastructure

construction; local government support for retired and demobilized personnel, operations

of the reserves and militia, and pay for local cadre who support the military; as well as

the value of PLA sideline production of food and its sales of any excess property and

equipment. The amounts of these extrabudgetary sources likely vary from year to year

and some funding that previously was “off-the-books” may now be included in the

official defense budget. The exchange rate value of the Chinese currency also has an

important impact on China’s defense budget which needs to be taken into account in

estimates of “total defense-related spending.” As a result of these factors, foreign

estimates of the size of China’s “actual defense budget” or “total defense-related

spending” vary greatly. This paper does not attempt to judge which of the numerous

foreign estimates of Chinese defense spending is most accurate.

The Chinese presentations in to the USCPF delegation provided valuable data about the

structure and process of Chinese defense budgeting, including highly detailed discussions

of changes in personnel expenditures as well as the relevant budget organizations and the

planning calendar. Over the course of the meetings, the Chinese side explained three key

1 The Chinese currency is known as the renminbi (RMB). It is also referred to as yuan.

Executive Summary

1

pieces of defense budget information not previously known to the experts on the U.S.

delegation. First, the Chinese side provided a tripartite breakdown of the personnel (RMB

83.159 billion), operations and maintenance (RMB 80.683 billion), and equipment (RMB

83.656 billion) costs in the published 2005 defense budget of RMB 247 billion. Second,

the PLA participants offered deep insights into the RMB 13.5 billion salary adjustment

July 2006, and provided detailed data about the dramatic increases in their own personal

salaries and retirement benefits. Third, the Chinese delegation disclosed that higher

global oil prices have resulted in fuel budget overruns of more than RMB 10 billion in

2006. Each of these facts was corroborated after the trip through interviews and primary

sources, and much of the information later appeared in China’s newest Defense White

Paper, published in December 2006.

While these meetings were a good start and the progress to date has been promising, there

is still a long way to go. Through this effort we have acquired a better understanding of

the composition of the officially announced Chinese defense budget, a more detailed

listing of the types of extrabudgetary inputs, and a general knowledge of the process by

which the military budget is formulated and executed. But we do not yet have enough

information to make a reasonable estimate of the total amount of Chinese “defense-

related spending.”

The information and insights gleaned from the USCPF delegation’s dialogue in China

raise the immediate and appropriate question: where do we go from here? We assess that

there is an opportunity both to expand existing Track II exchanges and also to create a

distinct defense budget working group under the framework of the existing U.S.-China

Defense Consultative Talks (DCT). The goals of such a working group would be two-

fold: to develop a common baseline for analysis and comparison, and to narrow

misunderstandings about each other’s national defense intentions, priorities and plans.

The working group could begin by focusing on questions related to strategy and policy,

including secrecy versus openness and national budget priorities. A second major activity

could be negotiating a common definition of defense spending. This report’s definition of

“total defense related spending” would be one place to begin, as it incorporates elements

of other major international standards. A third part of such a dialogue could be even more

specific and focused on the content of American and Chinese defense budgets. A final

part of this dialogue should focus on the defense budget formation process and related

reforms.

We hope that this report will prove useful to those outside China who feel a need for a

more accurate understanding of Chinese defense spending and the budgetary processes

that support it. We also hope that it will stimulate our military dialogue partners in China

to educate us further. We need their assistance to correct misunderstandings and to

improve our still very imperfect understanding of China’s total defense-related spending

and its implications. Without their help, no one abroad can hope to assess China’s

military modernization accurately or objectively and foreign apprehensions will grow

apace with China’s burgeoning defense budget.

Defense-Related Spending in China

2

INTRODUCTION

The accurate appraisal by U.S. defense planners of the level of resources assigned by

foreign states to national defense is essential to America’s ability to assess these states’

current and future military capabilities. Such estimates inform threat estimates and are the

basis for the planning and funding of U.S. defense forces against foreseeable challenges.

The quality of U.S. decisions about our national security as well as tens of billions of

dollars of defense spending rests on the accuracy of these estimates.

There is near universal agreement that China’s drive for wealth and power is among the

most formidable potential challenges to U.S. national security in the 21st century. In the

face of uncertainties over the implications of these trends for global and regional security,

the improving capabilities of the People’s Liberation Army (PLA) have become a

significant factor in U.S. force planning for the Asia-Pacific. Rapid growth in the

officially announced Chinese defense budget is the most obvious aspect of PLA

modernization and is the source of growing concerns to U.S. policymakers and

strategists.

Defense budgets are a visible manifestation of national strategic intentions, priorities, and

policies, but seldom, if ever, include all military and military-related spending. Major

categories of such spending are often contained in other budgets or handled on an ad hoc

basis. This is the case, for example, in the United States, where the defense budget

excludes huge amounts of such spending, such as combat operations in Afghanistan and

Iraq (funded through supplemental appropriations), nuclear weapons (in the Department

of Energy budget), benefits for wounded and disabled soldiers (Department of Veterans

Affairs), homeland security functions (Department of Homeland Security, Justice

Department), and so forth.

There is no agreed international standard for the construction of defense budgets. Each

country includes or excludes categories of spending in such budgets in accordance with

its unique military history, roles and missions, force structure, acquisition procedures,

accounting practices, and national security traditions. Superficially identical budget

categories may embrace vastly different activities, making unadjusted comparisons of

defense budgets highly misleading as measures of military and military-related spending.

Budget reforms can make them even less indicative of trends in such spending.

For decades, the PLA viewed secrecy and opacity about its capabilities and operations as

an essential component of its strength, causing foreign adversaries to underestimate

Chinese military weakness and to overestimate PLA capabilities. China has become more

open in recent years but we still lack more than rudimentary understanding of what

military and military-related spending is and is not in the PLA budget. Chinese budgeting

processes, accounting methods, and acquisition policies are, like the Chinese economy, in

a state of rapid evolution. We lack insight into these changes and their implications.

Chinese published budget data aggregates spending in ways we do not understand. The

result of all these gaps in our knowledge is analysis from incomplete, flawed data, based

on crude speculation and empirically unsubstantiated methodologies. No one, not even

those in the intelligence and academic communities who labor to produce the widely

Introduction

3

varying estimates of Chinese military spending that circulate in the United States, has any

confidence in the numbers or any certainty about their significance.

Though the PLA has briefed visiting officials from the Office of the Secretary of Defense

on the process by which it constructs its budget, it has traditionally viewed pressure for

greater transparency as a hostile effort at intelligence collection intended to gain military

advantage. This tendency has been reinforced by press reporting and commentary

implying that the funding of military spending from outside the defense budget or

through special budget allocations (as in the case of purchases of foreign weaponry)

constitutes an effort at deception or concealment rather than a budgetary practice similar

to that of the United States and other countries. Still, as China grows in military power,

some in China are beginning to argue that excessive secrecy may be counterproductive,

causing the United States and other countries to overestimate PLA capabilities and to

react in response to an exaggerated threat perception of China. Among other undesirable

consequences, they see this as risking the entanglement of China in economically

wasteful arms races it could not hope to win. Thus some Chinese national security

specialists now recognize the desirability of greater openness with respect to military

spending.

In this context, Ambassador (Ret.) Chas W. Freeman, Jr., co-chair of the United States –

China Policy Foundation (USCPF) suggested to General Xiong Guangkai, president of

the Chinese Institute of International Strategic Studies, that a previously agreed Track II

(i.e., unofficial) dialogue on Sino-American defense matters be devoted to disaggregating

and comparing military and military-related spending in both China and the United

States. He proposed that the object of working meetings during that dialogue be to

identify functional categories of spending common to both sides or unique to one or the

other, without regard to the department or budget category to which each side assigns this

spending in its national budget. Such functional categories would be organized in a

matrix that would be jointly developed to facilitate later bilateral or multilateral

comparisons with third countries’ military spending, as appropriate and desired. The

USCPF would publish a report containing the preliminary results. This could provide a

benchmark for follow-up discussions, if both sides agreed a continuation of the process

would be useful. General Xiong, who was until recently the Deputy Chief of the PLA

General Staff Department, accepted this proposal and undertook, on a Track II basis, to

assure the participation of PLA officers able to provide Chinese data to compare with

U.S. data provided by American counterparts. This report contains the results of the

initial meetings and proposes a roadmap for future exchanges.

Defense-Related Spending in China

4

SECTION 1. USING A COMMON BASELINE: DEVELOPING A STRUCTURE TO

COMPARE U.S. AND CHINESE TOTAL DEFENSE-RELATED SPENDING

The goal of the USCPF delegation was to better our understanding of total defense-

related spending in China by comparing it to total defense-related spending in the United

States. We adopted the terminology, “total defense-related spending,” to emphasize that

relevant expenditures are not confined solely to money in defense budgets. For example,

in the U.S. many costs related to nuclear weapons and propulsion systems are in the

budget of the Department of Energy. In both the U.S. and China some costs associated

with personnel retirement are outside the defense budget. The keystone of our philosophy

is that all expenditures made as the result of decisions to provide military capability in

defense of the nation from external threats should be included in international spending

comparisons. By definition, total defense related spending is directed primarily outward

toward deterrence or defense against external threats or internal armed threats to

domestic stability, but does not include routine law enforcement activities undertaken to

maintain order within the country.

There are two reasons for wanting accurate comparisons of total defense-related spending

across countries. The first is to understand the amount of defense capability the countries

are buying every year. The second is to understand the economic sacrifices being borne

to build and use defense capability.

Total defense-related spending is not the same as defense capability. It is related to

annual increments in defense capability. Some defense-related spending, spending on

personnel for example, is needed to maintain the defense capability embedded in the

defense-related capital stock. Some defense-related spending increases capability by

increasing the capital stock or by improving the quality of the capital stock in the short-

or long-term. Expenditures associated with actual operations may have little to do with

the development of additional defense capability. Thus, even the best comparison of total

defense-related spending across countries will be an imperfect indicator of investment in

increased defense capability. Comparisons of expenditures on new equipment and on

research and development may be more illuminating in this regard, and they will be

discussed later.

Comparisons of total defense-related spending are much more tightly linked to the

sacrifices being borne to provide defense. Defense-related spending uses resources that

could be devoted to raising the standard of living of the population either directly through

increased consumption or through investments in increased future productivity. A

consistent examination of total defense-related spending across countries provides clear

insight into the priorities being given to defense as compared to other government

priorities.

Developing comparisons of total defense-related spending will require four steps:

Specification of what should be included in total defense-related spending.

Specification of the categories into which total defense-related spending should be

disaggregated.

Using a Common Baseline

5

••

Presentation of spending by the two countries according to the agreed-upon

taxonomy in their own currencies.

The use of an agreed upon methodology to convert spending into a common

currency.

In this study we will only address the first three of these steps. Currency conversion

issues have to be tackled to place the resources devoted to defense in the two countries on

common terms, and were not part of the discussions held by USCPF and its Chinese

counterparts.

DEFINING TOTAL DEFENSE-RELATED SPENDING

Several definitions of total defense-related spending have been developed.

SIPRI Definition

The Stockholm International Peace Research Institute (SIPRI) definition is based on the

principle that military expenditure includes all current and capital expenditure on the

armed forces, including peace-keeping forces, defense ministries, paramilitary forces

when judged to be trained, equipped and available for military operations, and military

space activities.2

Such expenditures should include:

Personnel

o All expenditures on current personnel, military and civil

o Retirement pensions of military personnel

o Social services for personnel and their families

Operations and maintenance

Procurement

Military research and development (R&D)

Military construction

Military aid (in the military expenditures of the donor country)

SIPRI excludes:

Civil defense

Current expenditure for previous military activities

o Veterans’ benefits

o Demobilization

o Conversion of arms production facilities

o Destruction of weapons

2 This material is drawn from the SIPRI website, specifically

http://www.sipri.org/contents/milap/milex/mex_definition.html

Defense-Related Spending in China

6

•

•

•

••••••

••

This is a very useful taxonomy, but it includes two elements with which we disagree. In

today’s world, homeland defense is a major military mission and civil defense is a central

part of it. Excluding it seems inappropriate.

Many kinds of current expenditures for previous military activities are part of the life-

cycle cost of defense activities. When people enter into military service they know that

they will likely receive veterans’ benefits if they fulfill required service obligations.

There is no particular reason to differentiate between retirement pensions and other forms

of deferred compensation. Similarly, the life-cycle of weapons systems includes design,

procurement, operations, and disposal. The costs associated with all four phases should,

we believe, be included in total defense-related spending.

NATO Definition

NATO defines defense expenditures as outlays made by national governments to meet

the needs of their armed forces. The use of the term “national governments” limits

defense expenditures to those of central or federal governments, to the exclusion of state,

provincial, local, or municipal authorities. If one is interested, however, in either the

growth of defense capability or in the burden defense places on the national economy

these exclusions do not appear appropriate.3

The focus on outlays means that expenditures are not counted when they are budgeted,

but when they are made. Outlays are the best measure of the flow of resources into

defense, but budgets are the best measure of the commitment of the political process to

defense. Both are of interest.

War damage compensation, veterans’ pensions, payments out of retirement accounts, and

civil defense and stockpiling costs for industrial raw materials or semi-finished products

are not included in this definition of defense spending. With the exception of war damage

compensation and payments out of retirement accounts, which were counted when the

contributions were put into the accounts, these exclusions appear inappropriate.

In the case of the U.S., NATO’s definition includes spending on programs funded outside

the Department of Defense, namely the Department of State’s International Security

Assistance Programs and the defense-related portions of the Coast Guard and the

Department of Energy.

United Nations Definition

Since 1980 the United Nations has had a system for standardized reporting of military

expenditures. Member states are supposed to report annually.4

3 “2004 Statistical Compendium on Allied Contributions to the Common Defense,” U.S. Department of

Defense, page A-1.4 United Nations Instrument for Reporting Military Expenditures, available at

http://disarmament.un.org/cab/milex.html

Using a Common Baseline

7

The U.N. includes paramilitary forces and military assistance in its definition of total

military expenditures. It includes civil defense in its standard budget format, but does not

count it as part of “total military expenditures.”

United States Definition

The U.S. budget presents information for what is termed “The National Defense

Function.” It includes Department of Defense (DOD) military activities, the atomic

energy defense activities of the Department of Energy, and defense related activities of

other federal agencies. Most spending by the Department of Veterans Affairs and by the

Intelligence Community outside of DOD is not included.5

CHOOSING A DEFINITION

As a target for our efforts to compare total defense-related spending across countries, we

will use a modified version of the SIPRI definition. To the extent possible, civil defense,

veterans’ benefits, and weapons’ disposal costs will be included.

Defining the Chinese Armed Forces

Because of differences in the force structure of the Chinese armed forces and those of the

United States, it is necessary to define early in this study exactly what the Chinese mean

by this term. According to the PRC National Defense Law adopted on March 14, 1997,

the Chinese armed forces have three components:

The active and reserve units of the PLA

The People’s Armed Police (PAP) force

The people’s militia6

The PLA is organized into ground forces (the army), the PLA Navy, the PLA Air Force,

and Second Artillery (strategic missile forces). By the definition above, neither the PAP

nor the militia is part of the PLA. Both the PAP and militia meet the definition of

paramilitary organizations, while the PLA is a military organization.

The Central Military Commission (CMC) commands the armed forces of China. The

CMC exercises its command through the four national-level General Departments

(General Staff Department, General Political Department, General Logistics Department,

and General Armaments Department7) and the service headquarters for the Navy, Air

Force, and Second Artillery, as well as a separate headquarters for the PAP. (The army

does not have its own service headquarters. Service headquarters functions are performed

by the four General Departments.) Unlike most countries, the Chinese Ministry of

5 “National Defense Budget Estimates for FY 2007,” Office of the Under Secretary of Defense

(Comptroller), March 2006, page 1.6 All quotes in this section are from “PRC Law on National Defense” Beijing Xinhua Domestic Service in

Chinese 0556 GMT 18 Mar 97 translated by the Open Source Center.7 The four General Departments are commonly known individually as the GSD, GPD, GLD, and GAD,

respectively.

Defense-Related Spending in China

8

•••

National Defense is not in the direct chain of command of the Chinese armed forces,

though the Defense Minister routinely is a member of the CMC. (See Appendix 1.)

According to law, the active units of the PLA “are a standing army, which is mainly

charged with the defensive fighting mission,” which “when necessary, may assist in

maintaining public order in accordance with the law.” Thus, as a military organization,

the primary mission of the PLA is directed outward, but it also has a secondary mission

of domestic stability. Active forces are deployed throughout China in seven military

regions (MR), each of which encompasses several provincial-level military districts

(MD). Reserve units of the PLA “shall take training according to regulations in

peacetime, may assist in maintaining public order according to law when necessary, and

shall change to active units in wartime according to mobilization orders issued by the

state.” Reserve units are commanded by provincial military district headquarters, which

are under the command of the military regions.

On the other hand, the primary mission of the PAP is directed inward. The PAP “is

charged by the state with the mission of safeguarding security and maintaining public

order.” In performing this mission, it works closely with the civilian Ministry of Public

Security and, by law, is under “the leadership and command of the State Council and the

Central Military Commission.” The PAP has several types of units, the majority of which

are dedicated to internal security, but a significant portion of the force is tasked with

guarding gold mines, forests, water, electricity, and transportation facilities, as well as

performing border security, firefighting, and security functions for senior government

officials. As a secondary mission, in time of war, PAP units can act in local defense

operations in conjunction with PLA forces.

The militia, which is organized into small units in every corner of the country, can

support both external and internal security operations. Militia units are commanded by

local People’s Armed Forces Departments (PAFD) and “perform combat-readiness duty,

carry out defensive fighting tasks, and assist in maintaining public order.” PAFD are

under the dual command of the military (through military region and military district

headquarters) and the local Communist Party committees and governments at the same

level.

Units from all three components of the Chinese armed forces provide personnel,

equipment, and logistics support to disaster relief efforts as required.

The vast network of civilian Chinese defense industrial enterprises that produce military

weapons and equipment is not part of the PLA. Rather, the defense industrial sector is

supervised by the State Commission of Science, Technology and Industry for National

Defense (COSTIND). Prior to 1998, COSTIND had been a major headquarters in the

PLA at the level of the service headquarters and the military regions, manned by both

uniformed military and civilian personnel. In 1998, the old COSTIND was disbanded

with most of its military personnel going to the newly formed General Armaments

Department, while most of its civilian personnel were assigned to the new COSTIND,

which is now responsible directly to the State Council and not under the command of the

Using a Common Baseline

9

CMC. COSTIND and the PLA have a close relationship especially in defining equipment

requirements and establishing research and development priorities. But COSTIND and

the defense industrial base is now a separate management system within the Chinese

government – the PLA has no direct control over the functions of this system.

The differences in structural organization between the armed forces of the United States

and China make direct comparisons problematic. For example, both PLA and PAP units

have daily responsibilities for border defense and border control tasks, unlike the

situation in the United States where Department of Homeland Security agencies have

primary responsibility for border control. And while uniformed civilian cadre working for

the PLA are counted as active duty personnel (unlike civilians who work for the U.S.

Department of Defense), a large number of personnel who work in grassroots-level

People’s Armed Forces Departments are considered “local cadre” and are not part of the

active PLA. Yet these village and township-level PAFD personnel are responsible for

recruiting military personnel (similar to the duties of active duty recruiters in the U.S.

military), as well as performing other duties such as commanding militia units. Whenever

possible, these differences in systems will be highlighted in this report, but such

differences compound the problem of comparing of defense-related spending between the

two countries.

CATEGORIZING DEFENSE-RELATED SPENDING

Both the United States and China put together their defense budgets by organization and

by spending category. In the U.S. the organizational structure is based on the military

Services: Army, Navy, Air Force, and Marine Corps. It includes an additional category

for Defense Agencies and other “Defense-wide” expenditures that are budgeted and made

outside the Services. The Chinese structure revolves around the organizations that

prepare budget submissions: the Navy, Air Force, Second Artillery, the seven military

regions, and several other central organizations.

The U.S. has a more detailed set of spending categories than does China. The U.S.

categories are called major budget titles, or appropriation categories. They are military

personnel; operations and maintenance; military construction; procurement; research,

development, test, and evaluation (RDT&E); family housing, and revolving and

management funds. Most of these categories are self-explanatory. The last one has to do

with the financing of some operational expenses and can be viewed as closely related to

the operations and maintenance category.

China’s uses only three spending categories: personnel expenses; operations, training and

maintenance expenses; and equipment expenses. More detail on the nature of these

categories is presented in the next section of the paper.

Comparing the two structures, the personnel categories are quite similar, though the U.S.

category only covers military personnel, with civilian personnel being part of the

operations and maintenance category. The Chinese personnel category includes both

military and civilian personnel.

Defense-Related Spending in China

10

The U.S. operations and maintenance category includes more than the analogous Chinese

category. In particular, it includes the maintenance, transportation, and storage of

equipment which fall under the equipment expense category in the Chinese taxonomy.

The Chinese operations, training, and maintenance category includes the maintenance of

facilities, but not equipment.

It appears that the U.S. family housing category would fit under personnel expenses on

the Chinese side. Military construction would be in the Chinese training and maintenance

expense category. Procurement and RDT&E would be in the Chinese equipment expense

category.

In the future, comparisons of U.S. and Chinese defense budgets probably should be based

on the Chinese spending categories. U.S. civilian personnel costs can be moved from

operations and maintenance to personnel. The U.S. categories related to equipment can

be aggregated. The biggest obstacle to comparability will be the different treatment of

equipment maintenance. American expenditures in this area cannot easily be broken out

from the rest of the operations and maintenance category and moved to the equipment

category, as would be necessary for strict comparability with Chinese practice.

In this paper, U.S. and Chinese spending will be displayed using their separate

taxonomies, but considerable movement toward standardization appears possible.

Note that so far the discussion of taxonomies for categorizing defense-related spending

has been limited to the part of defense spending in the narrowly defined defense budgets

of the U.S. and China; that is, the DOD budget for the U.S. and the PLA budget for

China. Defense-related spending that originates in other organizations is not categorized

in the same way. In some cases, non-DOD funded defense-related spending is clearly tied

to personnel and can be so categorized. In others there is no alternative but to show such

spending by its source and purpose, not folded into the spending categories discussed

above.

For the U.S. the following categories of defense-related spending funded from outside

DOD will be addressed:

Department of Veterans Affairs (VA): The entire budget of this department is a

form of deferred compensation to military personnel. It covers both disability

payments associated with medical conditions that began during military service

and the cost of running VA medical facilities. Of course, DOD also runs its own

medical facilities and the cost of these is in the DOD budget.

Department of Energy: Atomic energy activities related to defense.

Department of Treasury: Some retirement costs for people who served before

1986, when a retirement fund was set up.

Department of Labor: Veterans’ re-employment and training programs

Department of Education: Payments to local areas for the education of military

children

Using a Common Baseline

11

•

••

••

Department of Homeland Security (DHS): Coast Guard, Border Patrol, and the

Transportation Security Agency are included, as are expenditures on

preparedness, emergency management, and science and technology. It is difficult

to be sure what to include from the DHS budget. Homeland security is certainly a

defense priority, but relief from natural disasters is not usually thought of as

defense-related. The Coast Guard spends much of its efforts on assuring the safety

of navigators, which are also not explicitly defense-related.

The National Aeronautic and Space Administration (NASA). We include the

entire NASA budget here, but much of it is clearly not closely tied to defense. A

better allocation should be developed.

Non-DOD intelligence organizations. It is difficult to get detailed information on

these expenditures, so we have used publicly available estimates.

Department of Justice (DOJ): This includes the part of the FBI and other DOJ

budget elements included in the “National Defense Budget”

State governments, which provide some funding for the National Guard. The

National Guard provides force structure to DOD and is mostly funded by DOD,

but it also serves the states. One could argue that state funding is for state

purposes, not national defense. We include them here, but may want to revisit this

choice in the future.

AN ESTIMATE OF TOTAL U.S. DEFENSE-RELATED SPENDING

We start by presenting the DOD budget for Fiscal Year 2006 by appropriation. After that,

estimated defense-related spending by other agencies is shown, broken down into items

that are related to military personnel costs and other expenditures. Then total spending

related to military personnel is shown, followed by our estimate total defense-related

spending in the U.S.

Table 1 shows the FY 2006 budget.

Table 1. FY 2006 DOD Budget by Service and Appropriation (billions of dollars)

Army

Navy/Marine

Corps

Air

Force Defense-wide Total

Military

Personnel 52.7 39.5 31.0 123.2

Family Housing 1.3 0.8 2.2 0.6 4.9

O&M and Other 71.1 45.3 46.4 62.5 225.3

Procurement 27.6 36.3 33.4 4.3 101.6

RDT&E 11.5 18.9 21.7 19.9 71.9

Construction 3.8 2.0 2.2 1.4 9.3

Total 167.9 142.8 136.8 88.1 536.2

Defense-Related Spending in China

12

•

•

•

•

•

Costs related to personnel, the military personnel account and family housing make up

24% of the budget. Operations and maintenance make up 42%. The investment accounts,

procurement; research, development, test and evaluation; and construction, together make

up 34% of the budget. Supplemental funding is included in the table.

Table 2 shows defense-related spending (in some cases estimates) from sources other

than DOD. The nature of what is included was discussed above. State government

contributions to the National Guard and the costs of non-DOD intelligence organizations

are estimates because precise numbers were not available. The numbers included for

NASA and the Department of Homeland Security are estimates because it is not clear

how much of the budgets for these agencies should be included as defense-related.

Total defense-related spending from sources other than DOD is estimated to have been

$186.6 billion in FY 2006. Of this $95.6 was related to military personnel.

Table 2. FY 2006 Defense-Related Spending from Non-DOD Sources

(billions of dollars)

Department of Veterans Affairs 70.4

Department of the Treasury 23.2

Department of Labor 0.2

Department of Education 1.2

Military Personnel Related 95.0

Department of Energy 18.7

Non-DOD Intelligence

Organizations 25.0 estimatedDepartment of Homeland

Security 27.4 estimatedNASA 16.3 estimatedDepartment of Justice 2.1

Other Federal Agencies 0.2

State Governments 1.8 estimated

Total 186.6

Table 3 shows that much greater detail is available on spending in the military personnel

account. Comparisons at this level might improve mutual understanding of the U.S. and

Chinese systems for managing and compensating military personnel.

Using a Common Baseline

13

Table 3. Detailed Breakdown of the FY 2006 Military Personnel Budget

(‘000s of dollars)

Total

Officer Enlisted

Basic Pay 14,120,277 30,998,371

Retired Pay Accrual 3,723,173 8,150,212

Basic Allowance for Housing 3,719,598 8,661,539

Basic Allowance for Subsistence 526,394 2,518,883

Incentive Pays 636,402 250,437

Special Pays 842,003 2,299,401

Allowances 378,032 2,040,263

Separation Pay 214,262 33,029

Social Security Tax 1,071,143 2,355,779

Academy Cadets 164,798

Subsistence-In-Kind 1,539,923

Family Subsistence Supplemental Allowance 5,689

Permanent Change Of Station 3,404,124

Reserve Components 14,392,393

Medicare - Retiree Health Care Contribution, Active 1,252,718 6,517,757

Medicare - Retiree Health Care Contribution, Reserve 2,750,584

Other Military Personnel Costs 127,870

Total (Without Supplemental) 113,395,054

When personnel costs funded through supplemental appropriations, family housing costs,

and funding from outside DOD are added, FY 2006 spending related to military

personnel, both current and former, was $223 billion, of which 43 percent was outside the

DOD budget.

Total U.S. defense-related spending in FY 2006 is estimated to have been somewhere

near $723 billion, including approximately 26 percent outside the DOD budget.

Defense-Related Spending in China

14

SECTION 2. INSIGHTS INTO CHINESE DEFENSE BUDGET STRUCTURE

SOURCES AND METHODS FOR UNDERSTANDING DEFENSE BUDGET

STRUCTURE

Foreign observers of the Chinese military currently have access to an increasing but still

insufficient set of sources detailing aspects of China’s defense budget structure. In its

series of White Papers on “Arms Control and Disarmament” and “National Defense,” the

Chinese government has publicly released basic information about the structure of its

defense budget, primarily for foreign audiences. In addition to these official documents, a

variety of Chinese newspapers, journals, and books expand upon the topic and provide

greater detail. Many of these sources are in Chinese and not readily available to non-

linguists, though significant information can be found in Chinese media available on the

Internet. Nonetheless, even after intense study by a wide variety of foreign governments

and scholars, large gaps about the structure and process of the Chinese defense budget

and defense-related expenditures persist. While the Chinese government has improved

transparency in this regard with the publication of its White Papers and it is understood

that all militaries will maintain some degree of secrecy about some specific details of

sensitive programs, many mundane facts, which if revealed would have little or no

adverse impact on overall China’s security posture, remain concealed from foreign

scrutiny. As a result, there is much speculation and guessing about the “actual” size of the

Chinese defense budget.

THE OVERALL BUDGET

Every year in March, in conjunction with the annual session of the National People’s

Congress, the Chinese government announces the size of the coming year’s defense

budget, as well as the percentage increase. Little detail is provided publicly about budget

details, though usually some explanation is given to justify increases over the previous

year’s numbers. Later in the year or in subsequent years, the government may publish

adjustments in the size of the budget to reflect actual spending, but this is done with

much less fanfare. Usually, any changes only marginally affect the size of the number

announced in the previous March. As will be seen, a significant exception to this general

rule occurred in March 2007, when the 2006 actual budget was adjusted upwards by

approximately 5 percent, due to the large pay raise that went into effect in July 2006.

Starting in 1995 with the publication of the White Paper on “Arms Control and

Disarmament,” and updated in each of the five White Papers on National Defense, the

Chinese government has provided additional detail about the officially announced

defense expenditure.8 Over this period of time, the announced defense budget, not

8 The first National Defense White Paper was published in 1998. Additional Defense White Papers have

been released every two years since then, usually in December. In 2003, a White Paper on “China's Non-

Proliferation Policy and Measures” was published, but it did not discuss defense expenditures. The 2005

White Paper on “China's Endeavors for Arms Control, Disarmament and Non-Proliferation” basically

repeated information from the 2004 Defense White Paper with the exception of providing a number for the

2005 defense budget, which was close to what had already been released earlier in the year. All Chinese

Chinese Defense Budget Structure

15

adjusted for inflation, has increased by over a factor of six, from approximately RMB 55

billion in 1994 to about RMB 350 billion in 2007. (See Figure 1 and Table 4 below.) This

increase is the result of consistent annual double-digit increases of over 10 percent (not

adjusted for inflation) and took place as the active duty personnel strength of the PLA

was streamlined from about three million to some 2.3 million. Concurrently, many old

weapons systems were retired and replaced, usually in fewer numbers, by more

advanced, sophisticated equipment. The training tempo for the entire force also has

increased significantly and grown more expensive as newer, more expensive weapons

have been added to the force. In a major break with past practices, since 2002 the PLA

has conducted a series of combined training exercises with foreign forces, many focused

on anti-terrorist operations, and opened a number of its internal exercises and

demonstrations to foreign observers. The Chinese armed forces have conducted

numerous internal disaster relief operations in recent years and the PLA has increased its

participation in overseas UN peacekeeping operations. These trends have all been

outlined in the White Papers.

The format and content of information about the defense budget contained in the White

Papers has been reasonably consistent over the years. Each White Paper contains

information about:

The total size of the current year’s defense expenditure and sometimes

information about the previous one or two years;

The composition of the budget, broken down into three broad categories

(personnel, operations and maintenance, and equipment);

Reasons for increases in the budget over previous years;

The defense budget as a percentage of total government expenditures and of the

Gross Domestic Product (GDP); and

The comparative size of China’s defense expenditures with those of other

countries.9

government White Papers are accessible at http://english.gov.cn/links/whitepapers.htm and

http://www.china.org.cn/e-white/index.htm.9 This section will not discuss the White Papers’ comparisons of China’s defense expenditures with other

countries because of the complexities involved in these comparisons due to exchange rates, inflation, and

differences in exactly what is included in a nation’s total defense expenditures. Without accounting for

these factors, comparisons of defense expenditures among countries can be misleading. The Chinese are

correct, however, when they point out that both in actual numbers and in numbers relative to the spending

of other countries that the budget increases over the past 15 years started from a very low base. Senior PLA

officers still consider the force to be financially constrained and great efforts are made to save money and

conserve funds.

Defense-Related Spending in China

16

•

•

••

•

Figure 1. Growth of Announced Defense Expenditures

0

50

100

150

200

250

300

350

400

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

Billion, RMB

THE THREE STRUCTURAL CATEGORIES: PERSONNEL, OPERATIONS AND

MAINTENANCE, AND EQUIPMENT

The White Papers break down the total Chinese defense budget figures into the three

categories of personnel; operations, training, and maintenance; and equipment.10

This

nomenclature is helpful at a macro-level of analysis, and provides an initial framework

for discussions with the Chinese military on budgeting issues. As will be seen in the

subsequent chapter, Chinese primary sources provide much more detail about the

structure of budget categories.

Over the years, the subcomponents of these three categories have been identified, but no

details of how funds are distributed among subcomponents have been provided.

Personnel expenses mainly cover salaries, insurance, food, clothing, and welfare

benefits for officers, non-commissioned officers and enlisted men as well as for

civilian employees;

10

The PLA does not break down its budget by individual services because there is no single "Department

of the Army" for the PLA's largest service. However, the Central Military Commission, four

General Headquarters Departments, Navy, Air Force, Second Artillery, National Defense University,

Academy of Military Sciences, and National University of Defense Technology (known as "major

commands") all have their own budgets.

Chinese Defense Budget Structure

17

•

Training and maintenance expenses cover troop training, institutional

education, construction and maintenance of installations and facilities, and other

expenses on routine consumables; and

Equipment expenses mainly cover research on, experimentation with, and

procurement, maintenance, transportation and storage of weaponry and

equipment.11

As can be seen in Table 4, Chinese defense expenditures have been roughly divided into

thirds for each of the three categories over this entire period. From 1994 to 2005, specific

percentages varied among categories, but stayed within the range of 31 to 35 percent

each.12

The details of distribution by category usually did not include information about

the year that the White Paper was released, but instead provided information on prior

years (for example, the 2006 White Paper gave the break down for 2005, not 2006). The

number of years for which data is provided varies among White Papers and gaps in this

level of detail can be seen in the two most recent iterations of the document. Nonetheless,

the roughly one-third distribution of funds among categories has remained constant. From

1994 to 2006, growth in the size of the personnel account was the largest of the three

categories (growing at approximately 5.81 times the 1994 number or 581 percent),

followed by growth in the equipment fund (approximately factor of 5.41 or 541 percent),

and last operations, training, and maintenance (about factor of 5.01 or 501 percent). The

relative growth in the personnel account was spurred by the July 2006 pay increase,

where most members of the PLA received a large pay raise, approximately doubling

compensation for many personnel. While the 2006 White Paper, which was released in

December, acknowledged in general that this pay increase took place, it did not provide

details or discuss how the pay raise affected the distribution percentage among the three

categories of the defense budget. Rather, the impact of the pay raise is strongly suggested

based on the budget information announced in March 2007, specifically the increase in

the final year-end budget number compared to the figure announced the year before. (See

the following section for details.)

11

These subcomponents are as defined in the 2006 White Paper.12

This one-third distribution scheme also extends down to the budgets for operational units. It reportedly

reflects 1985-86 guidance from the late Chinese leader, Deng Xiaoping and, as such, has long been immune

to reexamination.

Defense-Related Spending in China

18

•

•

Table 4. China’s Officially Announced Defense Expenditures

(in billions of RMB/percentage of total budget)

Year Total Personnel Operations Equipment

1994 55.071 18.774/34.09 18.845/34.22 17.452/31.69

1995 63.672

1996 72.006

1997 81.257 29.162/35.89 26.536/32.66 25.559/31.45

1998 93.47 32.27/34.52 29.80/31.88 31.40/33.59

1999 107.67 34.86/32.37 38.03/35.32 34.78/32.30

2000 121.29 40.55/33.43 41.81/34.47 38.93/32.09

2000 (update)* 120.754 40.550/33.58 41.274/34.18 38.930/32.23

2001 144.204 46.163/32.01 48.581/33.68 49.460/34.29

2002 169.444 54.043/31.89 58.123/34.30 57.278/33.80

2002 (update)** 170.778

2003 190.787 62.006/32.50 64.104/33.59 64.677/33.90

2004 220.001

2005*** 247.496 83.159/33.6 80.683/32.6 83.654/33.8

2006 283.829

2006 (update)**** 297.93 109.2/36.65(est) 94.37/31.68(est) 94.37/31.68(est)

2007 350.92

* Numbers for the year 2000 were provided in both the 2000 and 2002 White Papers.

** Numbers for the year 2002 were provided in both the 2002 and 2004 White Papers.

*** Numbers for 2005 provided during the USCPF delegation visit are consistent with

2006 White Paper.

**** Total is an update based on the March 2007 announcement that the RMB 350.92

billion for 2007 was an increase of 52.99 billion over 2006. Personnel, operations, and

equipment numbers are estimates for 2006 only. Previous numbers are based on data

from the White Papers.13

According to information in the White Papers, the percentage of defense expenditure to

GDP has ranged from a low of 1.09 percent in 1996 to a high of 1.63 percent in 2003,

dropping to 1.35 percent in 2005. As a share of total state financial expenditures, defense

expenditure has dropped from about 9.5 percent in 1994 to 7.29 percent in 2005. These

13

The estimates for 2006 are based upon the following calculations: In 2005, the personnel account was

33.6% of the total or about 83 billion (the figures they gave us). In 2006, applying the original 14.7%

increase to 83 billion, 12.22 billion should be added for a total of 95.2 billion (prior to the July pay raise).

Assuming the entire 14 billion actual increase (revealed in 2007) is applied only personnel, that total then

becomes 109.2 billion out of a total of 297.93 billion for a percentage of 36.65. Further assuming that

operations and equipment split the remainder equally, these accounts each amount to 94.37 billion or

31.675 percent (still significant increases in the absolute numbers for these accounts over 2005). This

assumption is probably wrong and either operations or equipment probably received a slightly larger

percentage of the budget, but it is likely to fall within a percentage of actual numbers – and still roughly

within the traditional spread of 31 to 35 percent per category, or consistent with the one-third breakdown

scheme.

Chinese Defense Budget Structure

19

numbers, however, only account for the official defense budget and do not include any

extrabudgetary categories.

As defense expenditures have grown, the White Papers have given increasingly detailed

explanations for the upward movement of the budget. In 1998, the White Paper asserted

that “the annual increase in defense outlay went for the most part to ensure that the living

standards of military personnel keep up with the nation's social and economic

development and with the increase of the per capita incomes of urban and rural residents,

so as to improve the living conditions of officers and men.” In 2000, after the divestiture

of PLA commercial activities,14

the demobilization of 500,000 personnel, and the return

of Macao to PRC sovereignty, three new reasons were given:

The annual increase in defense expenses went or will go [1] for the most

part to cover the increased spending for carrying out their routine duties

and operations after the armed forces have ceased commercial activities;

[2] increased spending for the placement of retired officers and their

pensions; [3] increased spending for pay and subsidy raises for military

personnel to keep their living standards in step with the nation's social and

economic development and with the increase of the per capita incomes of

urban and rural residents; and [4] increased spending for maintaining a

garrison in Macao.

In 2002, five reasons were given, reflecting changes in China’s social security system,

non-traditional security challenges after 9/11, and, for the first time, the expenses

associated with new equipment entering the force:

1) Increase in personnel expenses…. The past decade has witnessed…an 84% salary

raise for officers and 92% allowance raise for soldiers;

2 ) Establishment and gradual improvement of a social security system for

servicemen;

3) Increase in expenses for maintenance. Since the armed forces stopped commercial

activities in 1998, the budgets for training have increased year by year. With the

gradual improvement of living facilities and progressive office automation,

expenses for maintenance have continued to rise;

4) Increase in expenses spent on cooperation with the international community in

anti-terrorism activities;

5) Appropriate increase of expenses for the improvement of military equipment to

enhance defense capabilities under the conditions of modern technologies,

particularly high technologies.

14

The PLA has also divested itself of quartermaster factories formerly run by the General Logistics

Department that produced uniforms, shoes, and personal equipment by turning them over to local

government control. See “Remarkable Progress Made in PLA Logistics Socialization,” PLA Daily, 11 April

2005, and confirmed in conversations in Beijing with senior retired PLA officers as well as a visit to the

former PLA 3501 Factory outlet store during the first week of November 2006.

Defense-Related Spending in China

20

In 2004, five reasons again were listed, roughly similar to 2002, but with the addition of

costs associated with the 200,000-man reduction announced in 2003 (both in structural

reform and demobilization costs) and the recognition of the importance of education of

the force. The impact of new equipment was still listed last:

1) Increase in the salaries and allowances for military personnel;

2) Further improvement of the social insurance system;

3) Support for the structural and organizational reform of the military…[and to]

increase the expenses for the resettlement of the discharged surplus personnel

accordingly;

4) Increased investment in the development of high-caliber [human resource] talents;

and

5 ) Moderate increase in equipment expenses. This is aimed at promoting the

leapfrog development of weaponry and equipment, and stepping up preparations

for military struggle.

In 2006, increases in personnel expenses were first (as nearly always), but the cost of

equipment immediately followed, tacitly acknowledging the influx of new equipment

into the force in recent years, while suggesting this trend is to continue (though the White

Paper contained no information on any of the new Chinese-made weapons entering the

force or those imported primarily from Russia). Inflation of commodity prices was also

included as a factor in the rise of the country’s defense spending:

1) Increasing salaries and allowances for military personnel and improving their

living conditions. Along with the growth of China's economy and the steady

improvement of the people's life, the salaries and allowances of military personnel

and the pensions of retired officers have increased accordingly. The insurance,

medical, housing and other benefits have also increased. Subsidies are being

increased, too, to compensate for differences across regions and facilities, and the

living conditions of the troops stationed in hardship areas are being improved.

2) Increasing investment in weaponry and equipment and infrastructure. The PLA is

accelerating its informationization drive, increasing expenses for procurement and

maintenance of weaponry and equipment, upgrading the military infrastructure,

and improving the facilities for border and coastal defense troops.

3) Supporting the training of military personnel. The PLA is increasing input into

education and training through both military educational institutions and regular

institutions of higher learning. It is also increasing subsidies for professionals with

outstanding performance and incentives for experts, and increasing the budget for

the employment of contract civilians.

4) Compensating for rising prices. As the prices of oil, building materials and staple

and non-staple foodstuffs go up, the PLA accordingly increases the expenses on

military petroleum, oils and lubricants and defense engineering, and raises the

boarding subsidies.

Chinese Defense Budget Structure

21

5 ) Increasing expenses for international cooperation in non-traditional security

fields.15

Two Unexpected Expenses: The July 2006 Salary Increase and Unexpected Oil Costs

No details of the impact of the July 2006 pay raise were included in the White Paper.

However, during conversations in Beijing in November 2006 a retired PLA officer

provided specific details about the changes in the compensation structure. The 2006 pay

raise was applied to both active duty and retired personnel and affected nearly everybody

in the PLA. From July 2006 to the end of the year, an additional 13.5 billion RMB was

spent on salaries and other benefits.16

The 13.5 billion number mentioned in Beijing is

remarkably similar to the difference of RMB 14.1 billion between the RMB 283 billion

budget announcement in March 2006 and the actual 2006 figure of RMB 297.93

billion.17

It appears to be a reasonable assumption that most, if not all, of the difference

between the announced 2006 budget and the actual budget was the result of the pay raise

which went into effect during the second half of the year. This large pay increase skews

the traditional 1/3 distribution among budget categories to favor the personnel category

by a few percentage points at the expense of operations and equipment. More

importantly, when the size of the pay raise is applied to the full year of 2007, it amounts

to roughly RMB 28 billion, or over 50 percent of the entire 52.99 billion total budget

increase.

The size of the pay increase varies from individual to individual based on four factors:

Duty position grade and time in grade (years in that grade) (See Appendix 2)

Military rank based on seniority (years in that rank)

Time in service at RMB 10 per year (an increase from the previous number of one

RMB per year)

A new living allowance of RMB 560 for officers (enlisted personnel receive less)

For example, a retired major general with nine years at the deputy army grade, nine years

as a major general, and 43 years in service received about RMB 4000 per month in

retirement pay. (An active duty major general received about RMB 6000 per month.18

)

The July pay raise resulted in augmenting the retired general’s retirement pay by:

15

In addition to international cooperation such as UN peacekeeping operations, non-traditional security

missions also include domestic requirements such as disaster relief efforts.16

USCPF delegation conversations with senior retired PLA officers, November 2006. Similar raises in pay

have, according to collateral information, been granted to others in the national security-related professions,

e.g., foreign service personnel.17

This figure was calculated based on the announcement that “China's defense budget for 2007 is expected

to hit 350.92 billion yuan… an increase of 52.99 billion” over 2006. Subtracting 52.99 billion from 350.92

billion results in 297.93, which is an increase of 14.1 billion over the number announced in March 2006.18

At an exchange rate of RMB 7.8 to one U.S. dollar, RMB 6000 is about $769 per month. In the U.S.

military, a new recruit upon entering service received basic pay of $1,178 per month in 2006. A brand new

second lieutenant had a basic pay $2,416 per month. A U.S. major general with 20 years of service received

basic pay at $11,075 per month. For a complete accounting of basic pay and allowance, incentives, etc, see

Defense-Related Spending in China

22

•••

•

RMB 1710 for grade and rank

RMB 560 for living allowance

RMB 387 for 43 years of service (387 plus the 43 allowance previously received

equals 430 for 43 years of service)

The total, RMB 2657, is roughly a 66 percent increase over this general’s prior pay. It is

commonly understood that the pay raise doubled the salaries for most personnel.

Presumably active duty personnel would receive a greater percentage than retired

personnel, so it appears likely that some personnel had their pay raised by considerably

more than 100 percent.

As an example of how higher prices affected the 2006 budget, discussions in Beijing

revealed that an additional RMB 10 billion was spent over plan for the purchase of oil.

The amount spent for oil in 2005 is not known, however. In addition to increasing funds

for petroleum products, the PLA also has focused attention on fuel conservation and

efficiency measures in units of all services in recent years. Articles describing how much

fuel has been saved through conservation are not uncommon.19

BUDGET CATEGORY ONE: PERSONNEL

Every White Paper includes information about the PLA personnel structure. Of the three

major budget categories, the most information about personnel costs has been revealed.

The reports reveal the topline figure of 2.3 million active-duty personnel, but distribution

by service or according to ranks (officers and enlisted) has never been disclosed

officially20

. A close reading of all the White Papers reveals the following categories of

personnel receiving salaries from the defense budget:

Officers, including retired officers

“Non-ranking cadre,” known as wenzhi ganbu, who are uniformed civilians

working for the PLA usually in higher headquarters and administrative or support

positions, particularly in the fields of health and education. Wenzhi ganbu wear

military uniforms and have their own distinctive epaulets and collar insignia. The

1998 White Paper announced, “different from many other countries, China

includes… civil cadres… in the overall strength of the PLA.” The number of

uniformed civilians working for the PLA has not been released.21

Noncommissioned officers (NCOs)

http://www.dod.mil/dfas/militarypay/newinformation/WebPayTableVersion2006updated.pdf. The Chinese

government provides no similar detailed information about military pay.19

For example, a headline from the Jiefangjun Bao website on 15 January 2006 read, “Armed Forces Units

Throughout Country Save Close to 100,000 Tons of Fuel in 2005.”20

Statistics for U.S. active duty personnel specifying numbers for each officer and enlisted rank and service

are available at http://siadapp.dior.whs.mil/personnel/MILITARY/Miltop.htm. As of November 30, 2006, a

total of 1,420,206 personnel were on active duty in the U.S. military, including the Coast Guard.21

Wenzhi ganbu are roughly equivalent to civilians who work for the Department of Defense, who do not

wear uniforms, but are paid by the defense budget. As of August 2006, DOD employed over 670,000

civilians who are not counted as active duty personnel. See

http://siadapp.dior.whs.mil/personnel/CIVILIAN/fy2006/august2006/august2006.pdf.

Chinese Defense Budget Structure

23

•••

••

•

Conscripts

Cadets in military academies

Civilian employees, known as zhigong, or workers and staff. This category

includes the many workers and service personnel, such as drivers, necessary to

perform basic administrative and support functions. Unlike wenzhi ganbu, these

civilian workers do not wear uniforms and are not included in the count of total

active duty PLA personnel.22

In 2006, the PLA added a new civilian component of workers: non-active duty contract

civilian workers, often called wenzhi renyuan. Unlike the active duty wenzhi ganbu, these

civilians are not counted on the PLA’s rolls. Contract workers do, however, wear military

uniforms and are paid by the personnel account of the military budget.23

Contract workers

perform a variety of technical and administrative support jobs, such as “teaching,

research, engineering, health, culture and sports, library and archives, as well as some

administrative and logistics positions.”24

As of February 2007, the PLA had employed

some 6,000 of this new category of personnel throughout the force.25

The 2006 White Paper also revealed for the first time details of the manning of People’s

Armed Forces Departments. PAFD personnel perform many functions, including

recruitment of new personnel to serve in the armed forces and command of local militia

units. Two types of PAFD organizations are described by the White Paper – those found

county level and manned by active duty PLA personnel and those found at grassroots

levels (villages, towns, townships, and sub-districts), which are “non-active-duty

organizations” whose personnel are considered local civilian, not military, cadre. These

local civilian cadre are known as zhuanwu ganbu. As such, local governments must

provide the salaries for this unknown number of personnel found in every corner of China

who perform duties that directly support all components of the Chinese armed forces.26

The defense budget includes pensions for approximately 300,000 to 400,000 retired

officers.27

These retired officers are broken down into three categories:

1) Officers who reached the grade level of deputy army commander and above

(generally speaking this means they attained the rank of at least senior colonel or

major general).

22

Based on USCPF delegation conversations with senior retired PLA officers, November 2006, some

civilian workers in General Armament Department-managed maintenance depots and technical civilian

workers in research and development organizations are paid out of the equipment category of the defense

budget, not the personnel category.23

USCPF delegation conversations with senior retired PLA officers, November 2006.24

“Chinese PLA to Recruit More Civilian Employees,” Xinhua, March 3, 2006. For many years, the U.S.

military has employed a large number of contract workers who provide a variety of services.25

“Employment of nonmilitary personnel in the army begins to show effects,” PLA Daily, March 23, 2007.26

USCPF delegation conversations with senior retired PLA officers, November 2006.27

For comparison sake, the U.S. military budget supports about 2.1 million retired personnel and survivor

benefit recipients. See Charles A. Henning, “Military Retirement: Major Legislative Issues,” Congressional

Research Service Issue Brief, updated March 14, 2006, page CRS-1 at

http://www.house.gov/english/pdf/militaryretirement.pdf.

Defense-Related Spending in China

24

•••

2) Officers at division-level and below, who are paid by the military for the initial

period of their retirement and are then gradually turned over to the Ministry of

Civil Affairs to provide retirement payments. Money provided by the Ministry of

Civil Affairs to support retired officers is not included in the announced defense

budget.

3) Veterans who joined the PLA before 1949.28

Additional funds for resettling demobilized officers and enlisted personnel have been

necessitated by the reductions in force implemented since 1997. The Ministry of Civil

Affairs and local governments also help PLA personnel not qualified for retirement to

find jobs after they are demobilized from active service. Quotas are sent to local

governments from a Resettlement and Transition Office that works for the State Council

and coordinates with the General Political Department to formulate local demobilization

plans. Demobilized personnel are entitled to a one-time resettlement payment depending

on their length of service and location.29

For officers and NCOs, local governments send

requests to institutions and enterprises in their areas to help the new civilians find jobs. If

the officer or NCO volunteers to find his own job without government help, the one-time

payment will be higher. Demobilization and resettlement funds from the Ministry of Civil

Affairs and local governments are not considered to be defense expenditures by the

Chinese. This information may be reported to the State Council, but it is not provided

routinely to the military.30

In 2006, over 21,000 retired military cadres were transferred to

local governments for retirement placement and in total more than 150,000 retired

military cadres have been transferred to local governments since 1958.31

In early 2007,

the Ministry of Civil Affairs and the General Political Department jointly issued the

Measures on the Hand-over-and-Take-over Work for Transferring the Retired Military

Officers to the Local Government for Placement to standardize the work of transferring

retired military officers to the local government for placement.32

At the time of the 2007

budget announcement, People's Daily reported that within the total of RMB 350 billion,

“3.689 billion yuan [was] from the local budget.”33

This figure amounts to about one

percent of the total announced defense budget and is unlikely to include all funding from

local governments to support the Chinese armed forces. Unfortunately, no further detail

about the purpose of this local funding was released.

28

USCPF delegation conversations with senior retired PLA officers, November 2006. The Ministry of Civil

Affairs also provides pensions to some veterans who served before 1949 but retired in the 1950s, many of

whom then took civilian jobs. For 2005, that number was reported as 14.36 billion RMB. See “Government

Increases Subsidies For Oldest Red Army Veterans,” Xinhua, May 18, 2006.29

“Government to Speed Up Placement Service for Demobilized Soldiers,” Xinhua, January 3, 2006: “The

central government [likely the Ministry of Civil Affairs] allocated 17.5 billion yuan for the retired soldiers

or military officers' subsidies in 2005.”30

USCPF delegation conversations with senior retired PLA officers, November 2006.31

“150,000 retired military cadres transferred to local governments for placement,” in PLA Daily 2007-02-

08 at http://english.chinamil.com.cn/site2/news-channels/2007-02/08/content_730434.htm.32

“Measures on handing over and resettling retired officers promulgated,” PLA Daily 2007-02-14 at

http://english.chinamil.com.cn/site2/news-channels/2007-02/14/content_736240.htm.33

“Roundup: China's defense budget to rise 17.8 percent in 2007,” People's Daily March 05, 2007 at

http://english.peopledaily.com.cn/200703/05/eng20070305_354267.html.

Chinese Defense Budget Structure

25

The 2006 White Paper also for the first time offered a manpower figure for the People’s

Armed Police, asserting that this paramilitary force numbered approximately 660,000.

This figure is significantly smaller than most foreign estimates of the size of the PAP,

which have ranged between one million and 1.5 million over the past decade. The White

Paper also confirmed what had been generally recognized before that the People’s Armed

Police “has an independent budgetary status in the financial expenditure of the state.” As

such, the PAP budget is not considered part of defense expenditures. From the Chinese

perspective, based on its primary duties of ensuring domestic stability, the vast majority

of the PAP budget should not be considered as contributing to external defense.

Though most discussions of the personnel category of the PLA budget mainly focus on

pay and allowances for personnel, this category also includes food and clothing expenses

incurred by the force. Many PLA units at company level produce cash crops, such as

vegetables and fruit, and animals, such as pigs, chicken, or fish, to augment the food

consumed by the units. Excess from these sideline production efforts may be sold on the

open market to earn cash that can then be used to buy other necessities for the units.

Larger units maintain agricultural and sideline production bases, which produce staples

such as grains and legumes. Despite these efforts, the PLA is not self-sufficient in food

production and units must purchase some foodstuffs, especially processed foods and

rations for use in the field. The General Logistics Department does, however, have a few

research and development facilities that help in the development and testing of these

products.

Before 1998, the PLA ran several dozen quartermaster factories that produced most of

the PLA’s uniforms, shoes, boots, and personal equipment, such as load-bearing

equipment. These factories were part of the General Logistics Department system,

operated primarily by non-uniformed civilians working for the PLA. These factories now

have been turned over to local governments or other means of ownership. Many of them

still retain their old numeric designators, such as the 3501 Factory, and produce goods

used by the military (along with civilian products), but the PLA currently must purchase

their wares out of funds in the defense budget. Compared to overall cost of pay and

allowances, the percentage of funds dedicated to other aspects of the personnel account

are probably relatively small, but no details have been made public.

BUDGET CATEGORY TWO: OPERATIONS AND MAINTENANCE

Fewer specific facts are known about the composition of the operations and maintenance

category of the defense budget. Obviously a large portion of this category is dedicated to

the wide array of training conducted to prepare the force to execute its missions, plan and

organize its increasingly complex operations, and prepare its troops to effectively operate

and maintain its more sophisticated weapons and equipment. The new equipment is more

expensive to operate than in previous decades, as seen by the increase in oil costs, and

especially more expensive to conduct live-fire training with live ammunition.

Accordingly, to help manage costs, the PLA and defense industries have developed a

large numbers of equipment simulators to train pilots, drivers, gunners, and other

personnel in building the skills necessary for the future battlefield. As the PLA expands

Defense-Related Spending in China

26

its training in the field with troops and equipment, it also must reimburse local

governments and citizens for “maneuver damage” caused during the course of the

exercises. No details of amounts transferred to local governments, presumably from the

PLA operations budget category, are available and the issue remains controversial among

soldiers and local leaders.34

The 2006 White Paper repeats a statement that was first used in the 2000 edition,

“defense expenditure covers not only the active forces, but also the militia and reserve

forces.” As written, that statement implies that all expenses incurred by PLA reserve and

militia forces are paid out of the defense budget. In 1998, the first White Paper, however,

limited that support to logistics support, not personnel or operations: “In terms of the

scope of logistic support, these expenditures cover not only active service personnel, but

also militia and reserve requirements.” (italics added) Other recent information strongly

suggests that local governments actually provide the majority of funding for at least the

operational expenses for reserve and militia units. For example, in July 2006, Xinhua

reported that “Party committees and governments at all levels” should pay attention to

“solving practical problems of the militia and reserve forces in the course of training and

providing effective guarantees in terms of policy, funding, and materials.”35

(emphasis

added)

Education expenses to run the system of 67 PLA professional military education

institutions are generally included in the operations, training, and maintenance category

of the budget. The Ministry of Education also provides funding for a limited number of

officers to study at civilian educational institutes in China for graduate degrees. In 2003

the numbers reported were 60 students per year in 29 universities.36

The amount of

funding provided by the Ministry of Education for this program is not known. On the

other hand, funds to pay for national defense students, who do their undergraduate work

at civilian colleges and universities and are obligated to serve in the PLA upon

graduation, are included in the PLA operations budget. In 2006, over 10,000 high school

graduates entered this program at 112 civilian institutions. The PLA provides a yearly

scholarship of 5,000 RMB to each of the 40,000 students in this program.37

Presumably,

the PLA (or Ministry of Education) also provides some amount of funding to the

universities themselves to support this program.

Personnel and equipment from the PLA, PAP, and militia are routinely used throughout

China to respond to disasters and provide relief to civilians affected by floods, fires,

earthquakes, and other natural disasters. In 2005, regulations were issued that outline

procedures for reimbursement to the Chinese armed forces for performing these missions

based on who tasked the forces to act:

34

USCPF delegation conversations with senior retired PLA officers, November 2006.35

“Circular Issued on Commemorating PLA's 79th Founding Anniversary,” Xinhua, 17 July 2006. There

are many other articles in the Chinese military press that discuss the role of provincial and local

governments in providing funding for reserve and militia operations.36

“High-caliber talent program runs smoothly,” in PLA Daily, September 29, 2003.37

PRC: National Defense Students Train at Xian Electronics University CPP20060818145012 Xian

Shaanxi Ribao (Internet Version-WWW) in Chinese 29 Jun 06, translated by the Open Source Center

(OSC). This amounts to some 200 million RMB annually.

Chinese Defense Budget Structure

27

The expenses incurred by the army in participating in disaster relief

organized by the State Council shall be assumed by the State Central

Financial Department. The expenses incurred by the army in participating

in disaster relief organized by local people's governments shall be

assumed by the financial departments of the local governments.38

(italics

added)

With reimbursement from the central or local governments for activity related to

emergency tasks, the Chinese armed forces theoretically should be repaid for the

diversion of funds from their operations budgets to perform these important missions

(though not necessarily in the year that the expenses were incurred). The amount of

money reimbursed will vary from year to year and unit to unit depending on their

involvement in these operations.

Finally, within the operations and maintenance category, “construction and maintenance

of installations and facilities” is included. Renovation of old facilities, often with energy-

saving upgrades, and construction of new barracks and training grounds can be seen

throughout China. While the total cost of these projects is not known, in late 2005,

statistics from the General Logistics Department stated that 30 percent of barracks areas

had reached the standard of “new-concept barracks,” and “50 to 80 percent of Chinese

military barracks will be transformed in the next 10 years.”39

BUDGET CATEGORY THREE: EQUIPMENT

Of the three components of the Chinese defense budget, the Chinese government has

made public the least amount of detail about the equipment sector. No information has

been released about costs for weapons and equipment produced by the Chinese defense

industries. And little has been officially acknowledged about the specifics of foreign

weapons purchases, most of which are assumed to be funded by special state funds and

not from the PLA’s own budget. In particular, little is known about how research and

development funds are allotted to the military, COSTIND, and the civilian defense

industrial base.

The PLA has several armament research institutes that participate in the R&D for

weapons and equipment, as well as a number of weapons testing ranges and bases. Some

amount of PLA R&D funding is directed toward these institutes and bases; additional

R&D money is provided to the various elements of the civilian defense industrial base,

most of which probably comes from COSTIND, though some might also originate from

the Ministry of Science and Technology.

The Chinese space program is a joint military-civilian effort, presumably funded in large

part by R&D monies. Although the director of the General Armaments Department,

General Chen Bingde, is the “commander-in-chief of China’s space program,” within the

38

“PRC Regulations on Military Participation in Disaster Relief,” Jiefangjun bao, 7 June 2005.39

Liaowang Article Discusses 'New-Concept' Military Barracks CPP20060105058002 Shanghai Liaowang

Dongfang Zhoukan in Chinese 17 Nov 05 No 46, pp 35-39, translated by OSC.

Defense-Related Spending in China

28

program itself, the GAD manages only three systems (launch, tracking, and recovery

systems), with COSTIND’s China National Space Agency managing the rest.40

One final note as to how complicated the PLA budget can be, based on interviews in

Beijing, the salaries of some civilians who work at depot-level maintenance facilities and

technicians in R&D functions are paid out of the equipment budget, not the personnel

budget.41

CONCLUSION

In summary, the series of Chinese White Papers provide an elementary foundation of data

about China’s defense expenditures. When considered together, they provide a larger

body of data and information than any one single edition. Important trends and changes

can be discerned by comparing the White Papers with each other. Unfortunately,

discussion of defense expenditures in the White Papers is not as detailed or complete as is

needed to judge objectively the full scope of China’s defense modernization. Moreover,

many basic questions about the PLA remain unanswered officially, such as the size of the

individual services or numbers of officers, wenzhi ganbu, NCOs, conscripts, and civilian

workers on the payroll or the numbers of PLA and PAP troops who perform border

security duties every day of the year. Hints to the answers of many of these and

additional questions can be found by close examination of other Chinese sources, but

very few official sources provide answers at the level of detail required to build the

confidence in many foreign governments and analysts. Nevertheless, the Chinese

government’s publication of the White Papers on a regular schedule is a welcome

development and is to be encouraged. The Track II dialogue between the PLA and the

United States – China Policy Foundation is another positive step along this path.

While the White Papers are a good place to start in the quest to understand total Chinese

defense-related spending, many questions remain about the extrabudgetary sources of

income available to the PLA, People’s Armed Police, and militia. Many of these

unknown, unquantified sources have been mentioned in the paragraphs above and come

from a variety of central government sources, as well as local governments, commercial

enterprises, and the activities of military units themselves. (See Table 5 for a summary.)

Others likely exist.

More official data from the PLA or the Chinese government in answer to some of the

questions raised above would help foreigners better understand China’s military

capabilities and thus shed light on Beijing’s strategic intentions. The amount of resources

dedicated to China’s military modernization should be considered in light of other

national priorities. For example, though the announced defense budget in 2006 finally

amounted to nearly 300 billion RMB, in the same year 339.7 billion RMB from the

central government was spent on “the three rural issues” (agriculture, peasants, and rural

40

USCPF delegation conversations with senior retired PLA officers, November 2006. See “Shenzhou-6 a

milestone in China's space program: Chinese top legislator,” in People’s Daily, October 17, 2005, for

identification of Chen Bingde as “commander-in-chief of China’s space program.”41

USCPF delegation conversations with senior retired PLA officers, November 2006.

Chinese Defense Budget Structure

29

areas) and total R&D spending for the country also was reported at 300 billion RMB

(within this total R&D figure is an unknown amount applied to military projects).42

Table 5. Summary of Extrabudgetary Sources of Defense-Related Spending

Central Government

Foreign equipment purchases (from a special State

Council fund?)

Some/most military R&D from COSTIND (or Ministry of

Science and Technology?)

Some demobilization expenses from Ministry of Civil

Affairs

Some retirement expenses for soldiers from Ministry of

Civil Affairs (shared responsibility along with some

retirees supported by defense budget)

Some advanced education expenses for officers from the

Ministry of Education

Some military-related infrastructure construction (roads,

railroads, ports, air fields, etc)

Some reimbursement for expenses in disaster relief efforts

PAP expenses

Local Governments

(provinces, cities,

counties, etc)

Operational/training funding for PLA reserve units and

militia (some funding for reserve and militia is included in

the defense budget and additional support also comes from

enterprises in which militia units are organized)

Some demobilization expenses

Some military-related infrastructure construction in their

areas

Salaries for the "local civilian cadre" at village and

township level who man grassroots People's Armed

Forces Departments

Subsidies for electricity, water, coal etc supplied to PLA

barracks?

Some reimbursement for expenses in disaster relief efforts

PLA

Value of food (grain, vegetables, pigs, etc) produced by

PLA units in sideline production and consumed by

themselves

Value of food (grain, vegetables, pigs, etc) produced by

PLA units in sideline production and sold by units on the

local market for extra income

Value of excess land (or other property/equipment)

authorized to be sold by PLA units

42

Text of Government Work Report Delivered by Wen Jiabao at NPC Session 5 Mar 07

CPP20070305050001 Beijing CCTV-1 in Mandarin 0100 GMT 05 Mar 07, translated by OSC, and

“China's R&D investment up 22% in 2006,” in PLA Daily 2007-01-30 at

http://english.chinamil.com.cn/site2/news-channels/2007-01/30/content_720810.htm.

Defense-Related Spending in China

30

•

•

•

•

•

•

•

•

••

•

•

•

•

•

•

•

SECTION 3. INSIGHTS INTO CHINESE DEFENSE BUDGET ORGANIZATION AND

PROCESS

DEFENSE BUDGET ORGANIZATION

In addition to breaking the defense budget down into its constituent elements, it is

important to understand both the budget organizations themselves and the processes they

use to develop the budget, as both can provide further insights into the overall budget

itself.

The Defense Budget Organizational System

Figure 2 (see page 32) summarizes the overall PLA budget organization. At the top of the

chart is the Party leadership in the Politburo Standing Committee, followed by the

Politburo and the Central Committee, all of which set the country’s overall strategic

direction. Civilian governmental organs, headed by the State Council, comprise the right

side of the figure. Though many government bodies have responsibility over parts of the

financial and economic system, the Ministry of Finance is responsible for developing the

national budget, which includes defense spending below the national level. Civilian

government units at the provincial, municipal, county, township, and village levels

provide supplementary funding to the military units and organizations within their

jurisdictions.43

On the military side of the chart, the CMC is the highest command organization for the

military and is also the highest policymaking organization for PLA finance, where it

“manages defense outlays and assets jointly with the State Council.”44

It determines the

PLA’s modernization priorities, the direction of military development, and it is also

responsible for the level of total military expenditure. As part of this mandate, the CMC

provides unified leadership over the military’s entire financial dealings. The CMC is

responsible for examining and approving Five-year Plans (FYP) for military expenditure,

the annual general budgets for the PLA, general accounting, and large expenditures. The

CMC also approves and issues military-wide regulations on military financial work and

expenditure standards.45

The GLD is subordinate to the CMC and is responsible for allocating funds for all

budgetary items; working out the Five-year Plan for military expenditures and the annual

military budget as well as implementing general accounting for the military; drafting

military-wide financial regulations, arranging the military-wide system of finance

43

James Mulvenon, “China’s Military Expenditures,” in Keith Crane, et al, Modernizing China’s Military:

Opportunities and Constraints, Santa Monica, CA: RAND, MG-260-1-AF, 2005, pp. 91-134.44

Information Office of the State Council of the People’s Republic of China, “Chapter III: National

Defense Construction,” China’s National Defense, July 1998, accessed at http://www.china.org.cn/e-

white/5/5.3.htm#3 on March 27, 2006.45

Sun Zhiqiang, ed., Practical Encyclopedia of Chinese Military Finance (Zhongguo Junshi Caiwu

Shiyong Daquan), Beijing: PLA Publishing House, 1993; hereafter referred to as ZJCSD, pp. 10-11. In

2006, this book was in its 13th

edition, strongly suggesting its continued relevance.

Chinese Defense Budget Organization and Process

31

standards, and organizing the implementation of the total budget.46

Though the CMC

heads the entire PLA financial process, the military finance system is technically

subordinate to the GLD, with the GLD’s Finance Department specifically responsible for

financial affairs. Each subordinate logistics department at every level of the system has,

in turn, a subordinate finance department, division, office, or branch under the joint

direction of the logistics departments and the logistics finance departments at higher

levels. Below regimental level, lower level units do not necessarily have logistics finance

departments, but they will have established their own equivalent financial organizations

or finance cadres.

Figure 2. The Chinese Defense Budgeting Organizational System

Grassroots Units

Finance Office

Regimental

Finance Branch

Division/Brigade

Finance Offices

Corps Level

Finance Division

Military Region

Joint Logistics Dept

Finance Depts

Military Region

Finance Depts

GLD Finance

Department

General Logistics

Department

Central Military

Commission

Ministry of

Finance

Ministry of

Education

Ministry of

Civil Affairs

Ministry of

Public Security

COSTIND

Villages

Townships

Counties

Provinces,

Municipalities

State Council

Party Leadership

The GLD Finance Department is the highest organization within the PLA finance system,

and it administers the entirety of the military’s financial work.47

Most important among

its responsibilities is drafting the mid-to-long term financial revenue and expenditure

plans for the PLA. Additionally, it manages the PLA’s annual budget and general

accounting, carries out assessments and revisions of the military-wide system of finance

standards, ensures the overall balance of the budget, and adjusts and manages all

46

ZJCSD, pp. 10-11.47

ZJCSD, pp. 10-11.

Defense-Related Spending in China

32

military-wide revenue and expenditure plans. Specifically, the logistics finance

departments are responsible for:

Managing the military’s financial affairs

Planning and balancing expenditure items

Managing transfers, receipts, and payments

Settling accounts

Reporting expenses

Examining product pricing from military enterprises

Reporting on budget and financial supervision48

To facilitate the budgeting process, the GLD Finance Department manages a vertical

system of subordinate logistics finance departments at every level of the military. The

budgeting process also includes operating departments. These operating departments are

under the control of their functional chains of command, while the system of finance

departments exercises oversight of their budgets. At each level, operating and logistics

finance departments exercise shared management over budgetary expenditures. While the

logistics finance departments are concerned with the management of military finances,

the operating departments are focused on spending these finances.49

Party committees are

also involved at all three management levels and are responsible for examining and

approving annual budgets and large projects for their work units.50

A final role the GLD

Finance Department performs is that it directs the account settlement centers.51

Sitting below the GLD are the military regions and armed services. The MR joint

logistics finance departments are responsible for examining and approving budgets and

deciding on large expenditures for ground force, Navy and Air Force units subordinate to

the headquarters. They are also responsible for ensuring a balanced budget, drafting

supplementary regulations, implementing rules and regulations, handling funds transfers,

receiving funds for each budgetary item, and organizing and directing financial work for

the departments they supply with funding.52

The armed services logistics finance

departments have essentially the same functions; however, their main duty is to manage

the finances of those units directly subordinate to them.

The finances for all other PLAN and PLAAF units are managed by joint logistics

department finance departments, which comprise the third level of the finance system.

The JLD finance departments are responsible for supplying funds and managing the

finances for all ground, naval, and air force units that fall within their respective military

regions.

48

ZJCSD, pp. 10, 13, 132-133.49

ZJCSD, pp. 5, 11.50

ZJCSD, p. 10.51

ZJCSD, pp. 11-12. The PLA’s system of account settlement centers (ASCs) has both banking and

financial control functions. These centers manage capital, supervise the financial activities of operating

departments, and manage accounting. In particular, the ASCs are responsible for centralizing the financial

management (especially account settlements and expense reports) of operating departments under the

General Departments, military, regions, services, and lower-level units.52

ZJCSD, pp. 10-12, 132-133.

Chinese Defense Budget Organization and Process

33

•••••••

The fourth level consists of units at the corps/army-level and below that have party

committees. Organizations at this level are responsible for developing specific

implementation methods for supplementary regulations developed at the above level.

Like the level above, these units are responsible for overseeing budgets and large

expenditures.53

Grassroots spending units include companies, dining facilities, the officer cadet corps,

and management departments. Units at this level are primarily responsible for their direct

revenue and expenditure on personnel, maintenance, operating, and other expenses.

Generally, these units do not supply funds to other work units.

An Alternate Framework for Understanding Chinese Defense Budget Organization

POLICYMAKING UNITS

Policymaking work units are responsible for the system of financial regulations, the

formulation of management methods, the allocation of funding, and the organization of

and policymaking for major financial activities. Policymaking units include a variety of

high-level organizations, which are categorized according to their responsibilities within

the following four management levels:

1) CMC and General Departments

2) Military regions and armed services

3) Joint logistics departments

4) Units below the corps/army level

MANAGEMENT ORGANIZATIONS

Management units include military region air forces, naval bases, Second Artillery Corps

bases, group armies, provincial military districts, garrison commands, and logistics sub-

departments. These units organize, examine, and implement all financial work for the

units they fund.

IMPLEMENTING ORGANIZATIONS

Implementing work units include divisions, brigades, regiments, and equivalent units.

These units are primarily engaged in implementing the military finance system, ensuring

the completion of financial work ordered by upper levels, and dealing with revenue and

expenditure tasks.

53

ZJCSD, pp. 10-11, 132-133.

Defense-Related Spending in China

34

OTHER DEPARTMENTS

Operating departments are responsible for financially managing operating tasks. These

departments include hospitals, warehouses, military schools and universities, scientific

research organizations, military transport representative offices, military affairs

representative offices, and other financial management units. This group of organizations

is responsible for managing operating finances and income for their subordinate work

units and departments.

CHINESE DEFENSE BUDGET PROCESS54

The Chinese military budgeting process provides an important window into PLA

institutional equities and priorities. Interestingly, it is also one of the few areas of regular,

standardized interaction with the rest of the Chinese bureaucracy, and thus offers unique

insight into the military’s role within the system. As described in this section, the PLA

budget process includes formulating the budget, supplying funds to military units from

the budget, adjusting unit budgets during the year, and settling all year-end account

discrepancies.

At a macro-level, sources have documented the existence of three military budget

processes that operate more or less simultaneously. The first, known as the centralized

process, predominates and involves direct allocations from the state to the PLA’s central,

military region, and military district levels. The second, the decentralized process,

complements the centralized process with funds contributed by civilian government units.

A third system relevant to certain budgetary items is a combination of the centralized and

decentralized processes. 55

The 2006 White Paper for the first time included a brief discussion of the process of

formulating the defense budget.

China practices a strict system of financial appropriation of defense funds. The

PLA's budgeting is based on the defense development strategy, military building

objectives and annual military tasks set by the state. Budgeting units at each level

carry out studies to decide on their budget items, make calculations of their

requests for funds and then report to the next-higher authorities. The General

Logistics Department, working with the relevant departments of other general

headquarters/departments, analyzes, calculates and verifies the annual budget

requests submitted by all the military area commands, the Navy, Air Force and

Second Artillery Force, and draws up the defense budget. After being reviewed

54

This section is adapted from, Mulvenon, “China’s Military Expenditures,” pp. 97-100. Also see ZJCSD,

p. 142 and Modernizing China’s Military: Progress, Problems, and Prospects, p 205.55

Modernizing China’s Military: Progress, Problems, and Prospects, p. 205.

Chinese Defense Budget Organization and Process

35

and approved by the CMC, the defense budget is submitted to the Ministry of

Finance. The latter, on the basis of medium- and long-term fiscal plans and the

estimated revenue of the year, puts forward a plan for military expenditure

appropriations after consultation with the General Logistics Department, and then

incorporates it into the annual financial budget draft of the central government.

Upon approval by the State Council, the annual financial budget is submitted to

the Budget Work Committee of the NPC Standing Committee and the Finance

and Economic Committee of the NPC for review before it is submitted to the NPC

for review. After the budget of the central government is approved by the NPC,

the Ministry of Finance informs in writing the General Logistics Department of

the approved defense budget. The defense budget is then implemented down to

troops at different levels through prescribed procedures.

Financial departments are instituted at the General Logistics Department, military

area commands, Navy, Air Force and Second Artillery Force, and units at the

levels of corps, division (brigade) and regiment. These departments are

responsible for the appropriation, management and supervision of the defense

funds. The auditing offices of the state and the PLA conduct strict supervision of

the defense budget.

A significant revelation in the paragraphs above is the acknowledgement that “all the

military area commands [i.e., the seven military regions], the Navy, Air Force and

Second Artillery Force” each have their own budgets and submit their requests to the

General Logistics Department. Additionally, the Central Military Commission, the

Ministry of National Defense, the four General Departments, the Academy of Military

Science, National Defense University, and National University of Defense Technology

each have their own budgets.56

For financial purposes, these organizations are known as

“budget units” and are treated as equals.57

The relationship among these organizations is

seen at Appendix 1.

The Budget Calendar

The PLA fiscal year is the calendar year, starting in January and ending in December.

Little is known about the exact methods used to determine the topline of the budget each

year, since most of the available information on the macro-budgeting process is from pre-

zero based budgeting sources. Nevertheless, working from the calculated assumption that

the PLA’s centralized budgeting system still operates according to a down-up-down

dynamic, it is believed that the GLD works with the Ministry of Finance and the Central

Military Commission to establish total expenditure levels. The first “down” stage in this

procedure begins with the announcement of the annual military expenditure level in

March at the NPC.

Next is the “up” process commences each April and activates three additional steps. First,

all of the major PLA units – the MRs, service branches, military units at all levels,

56

USCPF delegation conversations with senior retired PLA officers, November 2006.57

USCPF delegation conversations with senior retired PLA officers, November 2006.

Defense-Related Spending in China

36

operating departments, and each of the General Departments – collects the following

budget materials and information:

Materials on the previous year’s general budget, itemized budgets, and related

earmarked expenditures

Information on how much of the current year’s finances can be devoted to

spending

How much the state plans to allocate for military expenditure (announced at the

NPC in March)

Expenditure targets from the CMC and General Departments

Current finance and economic policies and standards related to the military

budget

Reports justifying the military expenditure requests

In the second step, these work units calculate their funding needs, or the amount of

funding required for each item in the PLA’s budget.

The third step is to create drafts of the annual budgets for each work unit and the

operating departments’ itemized budgets. These drafts depend on the overall level of

military funding from the state, their specific allocations, and the tasks determined by the

CMC and General Departments. Using these factors, each unit’s draft lays out a detailed

expenditure plan and includes additional information, such as a budget statement, an

explanation of budget allocations, and steps for implementing the budget. After the

budget plan has been formed, the draft undergoes a process of examination and approval

that involves soliciting views from related departments, higher level departments, and

party committees. Drafts are completed by June.

These proposed budgets are then sent upwards through the system of logistics finance

departments and reach the military district logistics finance departments in July. The

military districts assemble the proposed budgets they receive and send them to their

respective MRs in August/September. The MRs then send the plans to the GLD Finance

Department. The USCPF delegation’s interlocutors in Beijing asserted that the PLA also

receive the defense budget ceiling from the Ministry of Finance by 10 November.58

Once

all of the estimates have reached the GLD (sometime in early fall) and the PLA has its

topline, an “All Army Logistics Conference” is held in Beijing in November to construct

the final budget.

After the conference concludes, the GLD sends the proposed budgets to the CMC, along

with the final accounts for that year. Once the CMC receives these bids and final

accounts, it compares the final accounts with the total expenditure level and allocations

proposed in the upcoming year’s PLA budget. The recommendations must then sent to

the Ministry of Finance by 10 December,59

the act of which then closes the books on that

year’s final accounts and sets in motion the next year’s military expenditure level

58

USCPF delegation conversations with senior retired PLA officers, November 2006.59

USCPF delegation conversations with senior retired PLA officers, November 2006.

Chinese Defense Budget Organization and Process

37

•

•

•

••

•

consultations among the state councilors, the Premier’s Office, and certain Politburo

leadership small groups.

Because the PLA's fiscal year is based on the calendar year and the National People’s

Congress is not held until March, each major command manages a "revolving fund" used

in the early months of each year (January through April), until the budget is finalized by

the Ministry of Finance.

In the final “down” step, the total military expenditure level is announced, along with the

total central budget, at the NPC in March. Final decisions on allocations are sent at this

time from the Ministry of Finance to the CMC, and down to lower levels through the

system of logistics finance departments. (See Figure 3).

Figure 3. The PLA Budget Process60

The PLA Budget CalendarApr MayApr May June July Aug Sept Oct Nov Dec Jan Feb Mar Apr

GLD Finance Bureaus down to division level assemble bids from ground, air, navy

Bids passed to MDs in July

Bids passed to MRs in August-September

“All-Army Logistics Conference” in Nov-Dec

Final accounts unit bids passed to CMC

CMC forwards recs to MinFin

MinFin closes books,announces new MilEx at NPC

Apr MayApr May June July Aug Sept Oct Nov Dec Jan Feb Mar Apr

Budget Process: Categories of Budgets and Funds

The overall expenditure level of the PLA’s general budget is determined in part (but not

entirely) by three lesser types of budgets:

Annual budgets from work units

Itemized budgets

Earmarked expenditures

Annual work unit budgets include the budgets of military regions, service branches, and

all levels of military units. From the military region/services level down to the regiment,

60

Mulvenon, “China’s Military Expenditures,” p. 99.

Defense-Related Spending in China

38

•••

as well as work units at equivalent levels, units draft and execute their own annual

budgets. The content of these budgets determines how lower-level units formulate their

budgets. Work unit budgets are structured much like the general PLA budget, although

variations do occur depending on the type and level of the work unit. During the annual

PLA budgeting process, these budgets are sent to the GLD Finance Department, which

then collates and sends them to the CMC.61

Itemized budgets are annual revenue and expenditure plans for itemized spending that are

formulated by “operating departments” at every level. Itemized budgets include the

budgetary funding and extrabudgetary income for that year and war reserve materials that

will be used to supplement budgetary funds.62

Operating departments formulate itemized

budgets once a year based on their allocations from the general PLA budget and their

operating tasks.63

Earmarked budgets are revenue and expenditure plans that cover certain specially

designated expenditures. Earmarked expenditures include equipment procurement,

logistics equipment procurement, capital construction, fuel, scientific research, combat

readiness and operations, horses, and CMC reserve funds. Earmarked budgets are

formulated by either the relevant department or the finance departments and must then be

reported to the GLD or military regions for examination and approval.

Figure 4. The Structure of Chinese Military Finance

61

ZJCSD, pp. 133-134, 221.62

It is unknown how war material reserves supplement the budget. Two possible reasons are that excess

stock is counted as additional budgetary revenue or that excess stock can be sold.63

ZJCSD, pp. 133-134, 221.

Chinese Defense Budget Organization and Process

39

Types of Military Finance Funds

As emphasized above, Chinese defense-related spending is distributed across more than

just the PLA budget. Reports on of the Chinese defense budget have thus far only

provided top-level analysis of the PLA budget and have barely mentioned defense-related

budgets outside the scope of the PLA budget proper. The following section goes beyond

the current literature and not only provides extensive details on the PLA budget but also

describes other defense-related budgets that fall under what the Chinese term “military

finance.”

Internal Chinese military sources provide more detailed insights into the key components

of military finance. Unlike the descriptions in the White Papers, according to these

sources military finance is divided into four types of funds, descriptions of which are

listed below:64

1) Budgetary funds: These funds are allocated from the state to the military and serve

as the basis for military finances. These funds compose the PLA budget.

2 ) Extrabudgetary funds: these are composed of the military’s self-generated

income, supplementary income for the General Departments, profits from

military-run production, income from business development, and miscellaneous

income. These funds work in tandem with regular financing to units from the PLA

budget.

3) Earmarked military construction funds:65

these funds are used for People’s Armed

Forces Departments and national defense scientific research.

4) Interagency funding: these funds are appropriated by the state, local governments,

or related organizations. The management of these funds is entrusted to military

work units. This funding category covers expenses for militia operating tasks,

conscripts, foreign aid, local military training, project funds managed for the state,

people’s air-defense projects, mobilization preparation,66

and militia equipment

acquisition.

From this description, it is clear that Chinese defense-related spending includes inputs

from other central government agencies (such as the various ministries), local

governments, and contributions from units themselves.

At township and village level, the salaries for zhuanwu ganbu in the People's Armed

Forces Departments are paid by the local governments. These personnel are considered

local civilian cadre and are responsible for conscription and command of militia units. At

county-level and above, active duty officers man People's Armed Forces Departments

and are funded by the PLA budget.

64

ZJCSD., pp. 4-5, 132.65

Construction in this sense means all the measures required to build and maintain an effective force and

national defense science and research structure.66

Mobilization preparation funds are earmarked funds used for ensuring there are adequate numbers of

reserve and active duty troops. See Qian Shugen, ed., The Encyclopedia of Chinese War Mobilization,

Beijing: Military Scientific Publishing House, 2001, p. 174.

Defense-Related Spending in China

40

Some funds for demobilization are provided by local governments and the Ministry of

Civil Affairs, but those funds are not reported to the PLA, and rather any reports that are

made go to the State Council.

The General PLA Budget

The PLA budget is comprised of only the first funding category (“budgetary funds”),

with the three other funds categories defined as part of other, non-PLA budgets. The PLA

budget – also called the “general PLA budget” or the annual military budget – plans

funding allocations for the entire military, controls and directs the budgets for each

military level, and controls earmarked expenditures. It is itself divided into 15 functional

components:67

1) Personnel expenses

2) Official business expenses

3) Operating expenses

4) Education and training expenses

5) Equipment acquisition expenses

6) Logistics equipment acquisition and maintenance management

7) Equipment maintenance management expenses

8) Petroleum expenses

9) Capital construction expenses

10) Scientific research expenses

11) Operational readiness and operational expenses

12) Other expenses

13) Central Military Commission reserve management funds

14) Militia construction expenses

15) People’s Air Defense expenses

Table 6. Notional Mapping of Functional Budget Components Onto

White Paper Categories

PERSONNEL O&M EQUIPMENT UNKNOWN

Personnel expenses Official business expenses

Operating expenses

Education and training

expenses

Petroleum expenses

Capital construction expenses

Operational readiness and

operational expenses

Militia construction expenses

People’s Air Defense expenses

Equipment acquisition

expenses

Logistics equipment

acquisition and maintenance

management

Equipment maintenance

management expenses

Scientific research expenses

Other expenses

Central Military Commission

reserve management funds

67

ZJCSD, pp. 133-134.

Chinese Defense Budget Organization and Process

41

Supplying Budgetary Funds68

Previous analyses on PLA budget processes have focused on how the annual budget is

created. Less attention has been paid to how budgetary funds are distributed through the

military hierarchy. This distribution occurs through the military’s funding system, which

dictates how budgetary funds make their way from the CMC to military units at every

level of the PLA.

The military funding system operates according to the military’s hierarchical structure.69

At present, the GLD directly funds military regions, the Navy and Air Force, Second

Artillery Corps, and other large units. These units, in turn, fund their respective

subordinate units. In January 2000, the PLA established joint logistics departments at the

MR level to supply and fund the ground forces, Air Force, and Navy. Joint logistics

departments’ finance departments allocate funding to operational units through MR-level

service logistics departments finance departments. The Second Artillery Corps,

technically a service arm rather than a full service, is still directly funded through the

GLD. Looking at the funding organizations for each of these units (also see Appendix A):

Military regions: subordinate units in the MR are funded through the joint

logistics department finance department

Ground forces: the joint logistics finance departments fund the corps in their MR,

who in turn fund a system of divisions, brigades, regiments, companies, and other

work units at equivalent levels.

PLAN: the joint logistics finance departments fund the MR’s Navy logistics

finance department. This department then transmits funding through a system of

bases, naval garrisons, and ships

PLAAF: the joint logistics finance departments fund the MR’s Air Force logistics

finance department. This department then funds subordinate units through a

system of military region air forces (MRAF), corps and command posts, airfields,

ground regiment level work units, and grassroots food work units.

Second Artillery Corps: the Second Artillery Corps headquarters funds all

subordinate units through a system of bases, brigades and regiments, and

grassroots work units.

Logistics sub-departments: military region logistics departments receive funding

from the joint logistics finance departments in their respective MRs. These sub-

departments are not only responsible for funding hospitals, warehouses, and other

subordinate units, they are also responsible for funding units specified by their

military region.

Adjusting the Budget

Budgets or allocations sometimes need to be adjusted during the course of the year. This

is usually due to modifications of resources, tasks, or prices after the budget has already

68

ZJCSD, p. 134.69

That is, units that are directly under their chain of command. This type of funds supply is also termed

“organic supply”. See ZJCSD, p. 134.

Defense-Related Spending in China

42

•

•

•

•

•

•

been implemented.70

The July 2006 pay raise, which was implemented half way through

the fiscal year, appears to be the most significant recent example of a budget adjustment.

Account Settlement and Final Accounting71

At the end of each year, units are required to settle their budgetary accounts and draft

final accounting reports, which summarize how their military budgets were implemented.

Final accounting follows specific procedures depending on the type of funding. In

general, each operating and logistics finance department works out its own final accounts.

These reports must be verified and approved before making their way through the finance

system. The GLD Finance Department compiles these final accounting reports into one

report for the entire PLA budget, which is then sent to the GLD for examination. The

GLD, in turn, sends the report to the CMC for approval, which also reports the final

accounting to the Ministry of Finance.

70

ZJCSD, p. 225.71

ZJCSD, pp. 143, 225, 227.

Chinese Defense Budget Organization and Process

43

SECTION 4. CONCLUSIONS

WHAT DID WE ACCOMPLISH?

Our meetings with the PLA and the resulting data provided in this report generated two

major insights relevant to improving our understanding of the Chinese defense budget –

as well as improving the quality of U.S.-China dialogues on sensitive military questions.

First, the delegation’s conversation with the PLA initiated a process of bilateral defense

budget consultations, albeit of the Track II variety, that could grow into a more

substantive and formal interactions. The PLA’s willingness to engage in this process with

the USCPF delegation indicated that the Chinese view bilateral defense budget

consultations as an area potentially worthy of discussion. Our delegation sensed a nascent

and growing Chinese recognition that national defense budget information serves as an

important signal to other nations of China’s national strategic intentions, priorities and

policies. Thus, a new avenue for bilateral military consultations may be opening.

It is critical that any formal bilateral defense budget dialogue include the deceptively

simple task of proposing national definitions of defense spending (i.e., what is in and

what is out) in an effort to agree upon a common definition that can then be used to

generate numbers that facilitate comparison. Although likely to be a complex task, it is a

necessary part of a process of military-to-military interactions that gradually reduces

suspicions through the channel of gradual and selective transparency. It may also provide

the PLA with the time and opportunity to create an internal process for gathering this data

from within their disparate bureaucracy.

Third, the delegation’s discussions in China helped both sides to identify the precise

scope of the differences between the U.S. and the Chinese defense budgets. The

remaining differences are myriad and are the source of enduring concerns about China

among U.S. strategists and defense planners. The data in China’s official defense budget

is limited and highly aggregated, constraining the ability to compare it to international

standards. Some of the most basic information on the budget and budget processes is

lacking:

Contributions to the PLA budget by civilian government units

Extrabudgetary expenditures, such as foreign arms acquisitions

Expenditures by service branch

Expenditures by functional category

Conclusions

45

••••

Second, our discussions revealed the importance of developing a common method for

assessing and comparing national defense budgets – an insight that should directly inform

future bilateral defense budget consultations. Perhaps the single greatest finding from our

trip was that the U.S. and Chinese use drastically different baselines and related methods

for counting the defense budget; this makes comparison a very challenging task. To

address this structural constraint, this report puts forward the concept of “total defense-related spending,” drawing from multiple international definitions, to facilitate such

comparison.

How funding allocations are determined

Further complicating the task facing Chinese military budget analysts is that China’s

official defense budget is so enormously disaggregated within different Chinese ministry

budgets that the PLA itself may not even know the total figure. The result is that some

defense spending usually included in Western budgets is not included in the PLA budget.

Defense budget items not listed in the PLA budget that are usually included in Western

budgets are:

Arms imports, especially large imported weapons systems

PAP expenses

Some demobilization and military pension costs

Some RDT&E expenses

Some extrabudgetary revenue

Funding from provincial and local governments

Some capital construction expenses for defense projects

Some elements of the nuclear weapons and strategic rocket programs

Overall, through this effort we now have 1) a better understanding of the composition of

the officially announced Chinese defense budget, 2) a more detailed listing of the types of

extrabudgetary inputs that augment the resources available to the Chinese armed forces,

and 3) a general knowledge of the process by which the military budget is formulated and

executed. Nonetheless, at this time, we do not have enough information to make a

reasonable estimate of the total amount of Chinese “defense-related spending.” There is

little data available to even guess at the size of many elements of extrabudgetary input –

the single exception is the foreign estimate of 2-3 billion dollars (U.S.) annually over the

past several years that have been allocated to the purchase of Russian weapons and

equipment. If data were available to calculate the size of other extrabudgetary funds

available to the PLA, it would also be necessary to determine an analytically sound

methodology to adjust the total sum to account for the differences in exchange rates

and/or the purchasing power of the RMB in the Chinese domestic economy. Moreover, as

the Chinese government provides more money to the PLA and slowly explains more of

this process, some of the assumptions of the past may no longer be operative, especially

as the value of the Chinese currency is gradually adjusted. In fact, some former

“extrabudgetary” sources of income may now be incorporated into the announced budget.

In the meantime, in order to be credible, any foreign estimate that attempts to gauge the

size of the “real” Chinese defense budget must delineate exactly what extrabudgetary

factors are included in their calculations, what amount of money goes to each factor, and

how currency conversion rates have been accommodated. Because of the imprecision of

these computations, a foreign estimate of “actual” Chinese defense spending should be

stated within a range of numbers, admitting that this range is only a guess, and not focus

only on the high end number in this range.

WHERE DO WE GO FROM HERE?

We assess that there is an opportunity to both further expand existing Track II dialogues

and to create a distinct defense budget working group under the framework of the

Defense-Related Spending in China

46

••••••••

•

existing U.S.-China Defense Consultative Talks. We propose that such a working group

could have the four part format detailed below. The goals would be two-fold: to develop

a common baseline for analysis and comparison, and to narrow misunderstandings about

each other’s national defense intentions, priorities and plans.

Strategy and Policy -- This could address three general issues: secrecy versus

openness, national budget priorities, and understanding U.S. and Chinese defense

budget priorities. Such an approach is premised on a negotiating approach that begins

with general topics and moves to increasingly specific ones.

Towards a Common Definition -- A second major activity could be negotiating a

common definition of defense spending. This report’s definition of “total defense-related spending” is one place to begin, as it incorporates elements of other major

international standards. This negotiation should be pursued with the intention of

creating a model that China could apply to bilateral military dialogues with other

nations.

The Content of the PLA’s Budget -- Given our limited information about so many

aspects of the PLA’s budget, there are at least five sets of questions (and various sub-

questions) that need to be addressed, including:

o How are local government contributions to “defense-related spending”

determined and how are they reported back to Beijing?

o What is the breakdown of defense-related spending by military region, PLAN,

PLAAF, Second Artillery, reserves, militia, PAP?

o How was the recent pay raise distributed among the ranks?

o How is defense-related research and development funded?

Understanding PLA Budget Processes -- A final part of this dialogue should focus on

the defense budget formation process and related reforms. Understanding this process

in China may help us to understand the types of budget information that China can

and can not provide as well as how the budget formulation process impacts other PLA

decisions unrelated to budgeting, such as its exercise and training schedule.

The USCPF assesses that these four categories of topics could provide fertile ground for

either furthering Track II defense budget dialogues with the PLA or to create a working

group with the formal DCT process that current exists.

Conclusions

47

•

•

•

•

APPENDICES

Appendix1

Source: PLA Daily website at

http://english.pladaily.com.cn/special/stength/content/index.htm.

Appendices

49

Du

ty P

osit

ion

Ran

k

(Grad

e)

Mil

itary R

an

kR

eti

rem

en

t

Age

Un

it L

evel

(Arm

y)

Un

it L

evel

(Navy)

Un

it L

evel

(Air

Force)

Un

it L

evel

(Secon

d

Arti

llery)

1. C

MC

Chair

man/V

ice

Chair

man

None

None

2. C

MC

Vic

e C

hair

man

or

Mem

ber

Genera

lG

enera

l H

Qs D

epts

(GS

D,G

PD

,GL

D,G

AD

)

3. M

ilit

ary

Regio

nG

enera

l/

Lie

ute

nant

Genera

l

65

Mil

itary

Regio

nH

Qs

HQ

sH

Qs

4. D

eputy

Mil

itary

Regio

n

Lie

ute

nant

Genera

l/M

ajo

r

Genera

l

63

Fle

et

Mil

itary

Regio

n

Air

Forc

e

5. A

rmy/C

orp

sM

ajo

r G

enera

l/ L

ieute

nant

Genera

l

55

Gro

up A

rmy/

Mil

itary

Dis

tric

t

Support

Base

Regio

nal

Com

mand

Post

Base

6. D

eputy

Arm

y/C

orp

sM

ajo

r G

enera

l/

Senio

r C

olo

nel

53

7. D

ivis

ion

Senio

r C

olo

nel/

Majo

r G

enera

l

50

Div

isio

n/

Mil

itary

Subdis

tric

t

Garr

ison/

Flo

till

a

Div

isio

n

8. D

eputy

Div

isio

nC

olo

nel/

Senio

r C

olo

nel

48

Bri

gade

Bri

gade

Bri

gade

9. R

egim

ent

Colo

nel/

Lie

ute

nant

Colo

nel

45

Regim

ent/

Gro

up/

People

’s A

rmed F

orc

es

Depart

ments

(county

)

Gro

up

Regim

ent

10. D

eputy

Regim

ent

Lie

ute

nant

Colo

nel/

Majo

r

43

11. B

att

ali

on

Majo

r/

Lie

ute

nant

Colo

nel

40

Batt

ali

on

Squadro

nB

att

ali

on/

Gro

up

Batt

ali

on

12. D

eputy

Batt

ali

on

Capta

in/M

ajo

r38

13. C

om

pany

Capta

in/

Fir

st

Lie

ute

nant

35

Com

pany

Com

pany/

Squadro

n

Com

pany

14. D

eputy

Com

pany

Fir

st

Lie

ute

nant/

Capta

in

33

15. P

lato

on

Second L

ieute

nant/

Fir

st

Lie

ute

nant

30

Pla

toon

Pla

toon/

Fli

ght

Pla

toon

App

en

dix

2

Defense-Related Spending in China

50

Delegation Members

Dennis J. Blasko, Lieutenant Colonel, U.S. Army (Retired), served 23 years as a

Military Intelligence Officer and Foreign Area Officer specializing in China. Mr. Blasko

was an army attaché in Beijing from 1992-1995 and in Hong Kong from 1995-1996. He

also served in infantry units in Germany, Italy, and Korea and in Washington at the

Defense Intelligence Agency, Headquarters Department of the Army (Office of Special

Operations), and the National Defense University War Gaming and Simulation Center.

Mr. Blasko is a graduate of the United States Military Academy and the Naval

Postgraduate School. He has written numerous articles and chapters on the Chinese

military and defense industries and is the author of the book, The Chinese Army Today:

Tradition and Transformation for the 21st Century (Routledge, 2006).

Ambassador Chas W. Freeman, Jr. is Co-Chair of the United States-China Policy

Foundation, Chairman of Projects International, Inc., a Washington-based business

development corporation, President of the Middle East Policy Council, Vice Chair of the

Atlantic Council of the United States, a trustee of the Institute for Defense Analyses, and

a member of the boards of directors of the American Academy of Diplomacy, the

Association for Diplomatic Studies and Training, and the World Affairs Council of

Washington, DC.

In 1993-1994 Ambassador Freeman served as Assistant Secretary of Defense for

International Security Affairs. In that position, he earned the highest public service award

of the Department of Defense for his roles in designing a NATO-centered post-Cold War

European security system and in reopening defense dialogue with China. He was U.S.

Ambassador to Saudi Arabia (during Desert Shield and Desert Storm), Principal Deputy

Assistant Secretary of State for African Affairs (during the successful U.S. mediation of

Namibian independence from South Africa and Cuban troop withdrawal from Angola),

and Deputy Chief of Mission at both Bangkok and Beijing. He was Country Director for

China from 1979-1981, a member of the advance team to open the U.S. Liaison Office in

Beijing in 1973, and the principal American interpreter during the late President Nixon’s

path-breaking visit to China in 1972. In addition to his East Asian, Middle Eastern,

African, and European diplomatic experience, Ambassador Freeman served in India.

Ambassador Freeman has a diploma from the Universidad Nacional Autónoma de

México, a BA from Yale University, and a JD from the Harvard Law School as well as

certificates in Chinese language (Mandarin and Taiwanese) and area studies. He was

elected to the American Academy of Diplomacy in 1995. His award-winning book of

quotations on statecraft and diplomacy, the Diplomat’s Dictionary, was published in

1994. A revised edition and a second book on the same subject, Arts of Power: Statecraft

and Diplomacy, were published by the United States Institute of Peace Press in 1997.

Mr. Stanley A. Horowitz is Assistant Director of the Cost Analysis and Research

Division at the Institute for Defense Analysis (IDA). Much of his work involves analysis

of the cost, measurement and enhancement of readiness. For the past few years he has

been analyzing the effectiveness of the Training Transformation Program. Recently he

has presented several papers in Beijing addressing the resource allocation system in the

Delegation Members

51

U.S. Department of Defense, the costs of personnel in the U.S. military, and total U.S.

spending on national security. He has directed studies of reserve component readiness,

reserve training, and reserve volunteerism. Before coming to IDA in 1985 Mr. Horowitz

was in charge of manpower, logistics and readiness research at the Center for Naval

Analyses. Mr. Horowitz was trained as an economist at M.I.T. and the University of

Chicago.

Evan S. Medeiros is currently a senior political scientist at the RAND Corporation in the

Washington, DC office. He specializes in research on Asian security affairs, China’s

foreign and national security policies, U.S.-China relations and Chinese military affairs.

In 2006, Dr. Medeiros was awarded a Council on Foreign Relations International Affairs

Fellowship. In 2005 he was chosen to be a Public Intellectual Fellow by the National

Committee on US-China Relations, the oldest American non-governmental organization

promoting US-China exchanges. This fellowship facilitates community outreach and

education programs on China for the American public.

Prior to joining RAND, Dr. Medeiros was a Senior Research Associate for East Asia at

the Center for Nonproliferation Studies at the Monterey Institute of International Studies,

in Monterey, CA. During 2000, he was a visiting fellow at the Institute of American

Studies at the China Academy of Social Sciences (CASS) in Beijing and an adjunct

lecturer at China’s Foreign Affairs College. Dr. Medeiros conducted research on Asian

security issues at the Carnegie Endowment for International Peace from 1993-1995.

Dr. Medeiros has written on a broad range of Asian security issues. A book on the

evolution of China’s WMD nonproliferation policies will be published in Fall 2007 by

Stanford University Press. His most recent publications are an article in the June 2007

issue of China Quarterly on China’s debate about its “peaceful rise” strategy and a

Washington Quarterly article on U.S. and Chinese “hedging strategies” in Asia. In 2005

and 2006 he published a book chapter titled “China’s Evolving Nuclear Doctrine,” and

three RAND studies called A New Direction for China’s Defense Industry (MG-334-AF);

Chasing the Dragon: Assessing China’s System of Export Controls on WMD-related

Goods and Technologies (MG-353), and Modernizing China’s Military: Opportunities

and Constraints (MG-260-AF). In November 2003, he published (with M. Taylor Fravel)

the lead article in Foreign Affairs called “China’s New Diplomacy” which has received

international attention.

His other publications have appeared in: The China Quarterly, Current History, Foreign

Affairs, Issues and Studies: A Journal of Chinese Studies and International Affairs, The

Nonproliferation Review, The International Herald Tribune, The Washington Post, The

Washington Quarterly, IISS’s Strategic Comments, Jane’s Intelligence Review, The Los

Angeles Times, YaleGlobal, the Christian Science Monitor, The Boston Globe, Defense

News, Asia Times, and the San Diego Union-Tribune.

Defense-Related Spending in China

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He holds a Ph.D. in International Relations from the London School of Economics and

Political Science, an M.Phil in International Relations from the University of Cambridge

(where he was a Fulbright Scholar), an M.A. in China Studies from the University of

London’s School of Oriental and African Studies (SOAS), and a B.A. in analytic

philosophy from Bates College in Lewiston, ME. He travels to Asia frequently and

speaks, reads and writes Mandarin Chinese.

James C. Mulvenon is Director (Acting), Advanced Analysis at DGI’s Center for

Intelligence Research and Analysis. Previously, Dr. Mulvenon was a Political Scientist at

the RAND Corporation in Washington, DC and Deputy Director of RAND's Center for

Asia-Pacific Policy. A specialist on the Chinese military, his current research focuses on

Chinese C4ISR, defense research/development/acquisition organizations and policy,

strategic weapons doctrines (computer network attack and nuclear warfare), patriotic

hackers, and the military and civilian implications of the information revolution in China.

His book Soldiers of Fortune (Armonk, NY: M.E. Sharpe, 2001), examines the Chinese

military’s multi-billion dollar business empire. Dr. Mulvenon received his Ph.D. in

political science from the University of California, Los Angeles.

Delegation Members

53